UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2003 Commission File No. 0-22810
MACE SECURITY INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 03-0311630
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1000 Crawford Place, Suite 400, Mt. Laurel, NJ 08054
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (856) 778-2300
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 ("the Exchange Act") during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers in response
to Item 405 of Regulation S-K is not contained in this form, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based on the last sale price of the Registrant's Common Stock
at the close of business on March 10, 2004, was approximately $16,257,094.
(Reference is made to page 18 herein for a statement of assumptions upon which
this calculation is based.) The Company does not have any non-voting stock.
The number of shares of Common Stock, par value $.01 per share, of the
Registrant outstanding as of March 10, 2004 was 12,462,670.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Mace Security International, Inc. ("the Company" or "Mace") was incorporated in
Delaware on September 1, 1993. On December 17, 2002, we effected a one-for-two
reverse stock split. All stock prices, share amounts, per share information,
stock options and stock warrants to reflect the reverse split, unless otherwise
noted.
Our operations are currently conducted through two segments: car and truck
washes, and security products. Since July 1999, our full service car and truck
wash segment has generated most of our revenue and profit. Our Security Products
Segment produces consumer safety and personal defense products, as well as
electronic surveillance and monitoring products. Before July 1999, this
segment's main business was the production and sale of less-than-lethal defense
sprays.
Beginning in May of 1999, we began developing our car wash operations through
acquisitions, including our merger on July 1, 1999 with American Wash Services,
Inc., a company that was engaged in the business of acquiring and operating car
wash facilities.
During 2000, 2001 and for the first four months of 2002, the Company did not
directly manage the Security Products Segment. During this period, the Company
was paid $20,000 per month under a Management Agreement pursuant to which Mark
Sport, Inc. ("Mark Sport"), an entity controlled by Jon E. Goodrich, a director
of the Company through December 2003, operated the Security Products Segment.
Effective May 1, 2002, the Management Agreement expired and the Company
recommenced operation of the Security Products Segment. On May 1, 2002, the
Security Products Segment consisted of consumer safety and personal defense
products. Electronic security and surveillance devices were added to the
Security Products Segment on August 12, 2002 when we acquired certain of the
assets and operations of Micro-Tech, Inc. ("Micro-Tech"), a manufacturer and
retailer of electronic security and surveillance devices. Additionally, an
expanded line of electronic security monitors was added to the Security Products
Segment on September 26, 2003, when we acquired the assets of Vernex, Inc.
("Vernex"), a manufacturer and retailer of electronic security monitors.
On July 9, 1999, we entered the business of manufacturing and selling
point-of-sale systems for the car wash and oil lubrication industries when we
acquired all the outstanding common stock of Innovative Control Systems, Inc.
("ICS"), a developer of point-of-sale systems for the car wash and oil
lubrication industries. On June 2, 2000, we exited the business of manufacturing
and selling point-of-sale systems when we sold ICS. All results of ICS's
operations have been classified as "discontinued operations."
The Company's periodic reports, as filed with the United States Securities and
Exchange Commission, can be accessed through the Company's website at
www.mace.com.
LINES OF BUSINESS
Car and Truck Wash Segment. The Company, through its subsidiaries, owns
and operates 51 car washes and five truck washes. We operate 13 car wash
locations in the region surrounding Philadelphia, Pennsylvania, which are
located in New Jersey, Pennsylvania and Delaware. We also operate six car wash
locations in and near the Sarasota, Florida area, 13 car wash locations in the
Phoenix, Arizona area, and 19 car wash locations in Texas. We also own five
truck washes located in Arizona, Indiana, Ohio and Texas. Except for nine of the
Philadelphia area car washes, which provide only exterior washing, and one Texas
location, which is a self-serve wash and lube facility, the rest of our
locations are full service car washes. The full service car washes provide
exterior washing and drying, vacuuming of the interior of the vehicle, dusting
of dashboards and door panels, and cleaning of all windows and glass.
Our typical car wash facility consists of a free standing building of
approximately 4,000 square feet, containing a sales area for impulse items and a
car wash tunnel. Cars are moved through the car wash tunnel by a conveyor
system. Inside the tunnel, automatic equipment cleans the vehicle as it moves
past the equipment. Additional extra services, including wheel cleaning,
fragrance, rust protection treatment, wheel treatments, and waxing are also
offered at the locations. Many of our locations also offer other consumer
products and related car care services, such as professional automotive
detailing services (offered at 41 locations), oil and lubrication services
(offered at 10 locations), gasoline dispensing services (offered at 19
locations), state inspection services (offered at seven locations), convenience
store sales (offered at one location), and merchandise store sales (offered at
41 locations). Our truck wash facilities provide washing and waxing services for
tractor-trailer and fleet transport vehicles. These services are provided by
hand. While certain acquisitions were pending in 2000, we managed several car
wash locations under operating agreements pursuant to which we were entitled to
all profits generated by those locations. Car wash and ancillary services
provided 88.6%, 94.5%, and 99.5%, of our revenues in fiscal years 2003, 2002,
and 2001, respectively. (See also, the Consolidated Statements of Operations in
the financial statements accompanying this report.)
2
Our car wash operations are not dependent on any one or a small number of
customers. The nature of our car wash operations does not result in a backlog of
orders at any time, and all of our car wash revenues are derived from sales in
the United States. For a discussion of seasonal effects on our car wash
operations, see Item 7, Seasonality and Inflation in Management's Discussion and
Analysis of Financial Condition and Results of Operations, page 29.
Security Products Segment. The Security Products Segment is comprised
of two operating divisions: the Consumer Products Division and the Electronic
Surveillance Products Division. The Consumer Products Division designs, markets
and sells consumer products for use in home and automobile and for personal
protection. The Consumer Products Division includes a line of defense sprays,
personal alarms, home security alarms, whistles, door jammers, and window and
door lock alarms. The defense sprays include tear gas sprays, pepper sprays, and
sprays with a combination of tear gas, pepper solution and UV dye. The
Electronic Surveillance Products include cameras, digital video recorders
(DVR's), and monitors. The cameras are offered in weatherproof, black and white,
and color models. Certain of the camera models also record audio. The DVR's are
offered in models which can simultaneously record with four cameras, eight
cameras or 16 cameras.
Substantially all of the manufacturing processes for the Consumer Products
Division are performed at our Bennington, Vermont facility. Defense spray
products are manufactured on an aerosol filling machine. Most products are
packaged in sealed, tamper-resistant "clamshells." The KinderGard(R) product
line is primarily manufactured by an unrelated company utilizing molds primarily
owned by Mace and packaged on-site at our Vermont facility. Mace Anti Crime
Bureau(R) ("MACB"), part of the Consumer Products Division, develops and markets
security products and literature for the domestic and foreign financial
community, including a "dye-pack" used by financial institutions for robbery
protection, state-of-the-art training videos and crisis response materials. MACB
markets to domestic and foreign financial institutions and related businesses
throughout the world through direct marketing and the use of independent sales
representatives and distributors as well as exhibitions at national trade shows
and advertisements in trade publications.
In the first quarter of 2000, we entered into a Management Agreement with Mark
Sport, a Vermont corporation controlled by Jon E. Goodrich, a director of the
Company through December, 2003. The Management Agreement entitled Mark Sport to
operate the Security Products Segment and receive all profits or losses during
the term of the Management Agreement. We retained the ownership of all of the
business assets. The Management Agreement was extended under several amendments,
and terminated on April 30, 2002. Under the Management Agreement, Mark Sport
paid us $20,000 per month. Additionally, Mark Sport paid us an amount equal to
the amortization and depreciation on the assets of the division. Effective May
1, 2002, the Management Agreement expired and the Company recommenced operation
of the Security Products Segment.
With the acquisition of certain of the assets and operations of Micro-Tech, a
manufacturer and retailer of electronic security and surveillance devices, on
August 12, 2002, the Company added the Electronic Surveillance Products Division
to its Security Products Segment. The Company has contracted with equipment
manufacturers, principally in Korea, China, and other foreign countries, to
manufacture system components in accordance with our specifications and in
branded packaging suitable for direct sale to consumers or distributors. As with
all new business undertakings, there are numerous risks associated with the new
business unit that may prevent the Company from operating it profitably. (See
Factors Influencing Future Results And Accuracy of Forward -Looking Statements,
page 8.) The Company began its sales efforts for the Electronic Surveillance
Products Division during the second quarter of 2003.
The Security Products Segment provided 11.4%, 5.5%, and 0.5% of our revenues in
fiscal years 2003, 2002, and 2001, respectively. (See also, the Consolidated
Statements of Operations in the financial statements accompanying this report.)
Point-of-Sale Systems and Software Sales and Development. On July 9,
1999, we acquired ICS in exchange for 604,000 (pre-reverse split) shares of
Company common stock and the assumption of $750,000 of debt. From July 1999 to
June 2000, ICS was involved in the development, marketing and sale of automated
point-of-sale control systems that are used to monitor, manage and analyze car
wash systems and lubrication centers. On June 2, 2000, we sold ICS. Accordingly,
all results of ICS' operations have been classified as "discontinued
operations."
3
BUSINESS STRATEGIES
Car and Truck Wash Segment.
Internal Growth. We believe that we can achieve internal growth
principally from additional sales into our current markets by providing superior
service and through our existing marketing efforts. To improve market share in a
given operating region, we spend approximately 2% to 3% of regional revenue on
regional advertising campaigns emphasizing coupons to attract volume with
discount offers and brand awareness. We believe that only about 30% of the
general population routinely use car wash services. We believe that this
relatively low level of participation is the result of (i) lack of effective
advertising; (ii) inconsistent wash quality and service levels across fragmented
locations; and (iii) concerns about scratches and other adverse effects from the
automated wash process. We believe that through consumer education and by
developing a strong brand reputation, known for consistent quality and safe,
dependable service across locations, we can increase consumer participation
rates and generate internal growth from existing locations. We also intend to
selectively implement price increases when competitive advantages and
appropriate market conditions exist.
Operating Efficiency. We have reduced the total operating expenses of
our businesses by implementing centralized financial controls. In addition, we
are continually implementing programs to take advantage of certain economies of
scale in such areas as the purchase of equipment, chemicals and supplies, parts,
equipment maintenance, data processing, financing arrangements, employee
benefits, insurance, and communications. We train our operating personnel to
emphasize customer service, labor efficiency, safe operations, and sales of
add-on and ancillary services. Location managers are trained to implement our
standardized service menu option list and high-margin service add-ons at each of
our locations.
Acquisitions. From May 1999 through December 2000, and including our
merger with American Wash Services, Inc., we acquired 62 car wash facilities and
five truck wash facilities through the acquisition of 17 separate businesses.
Eleven car wash facilities have been divested or closed. The majority of the
locations were acquired by acquiring a company, or the assets of a company, that
owned several locations in a given geographic area.
We will acquire car washes when we can do so on advantageous terms. In
evaluating potential acquisitions, we will consider: (i) our cash position and
the availability of financing at favorable terms; (ii) the potential for
operating cost reductions, revenue growth through advertising, and managerial
efficiencies; (iii) the commercial viability and underlying real estate value of
each location; (iv) the potential for geographic diversification throughout the
United States; and (v) other relevant factors. At the present time, we are not
in negotiations with any parties regarding potential acquisitions.
As consideration for acquisitions, we may use combinations of common stock,
cash, and indebtedness. The consideration for each future acquisition will vary
on a case-by-case basis depending on our financial interests, the historic
operating results of the acquisition target, and the growth potential of the
business to be acquired. Cash used for future acquisitions may be provided by
operations, loans and the proceeds of possible future equity sales.
We did not complete any car or truck wash acquisitions in 2001, 2002, or 2003.
4
Security Products Segment.
Internal Growth. The Security Products Segment designs, markets and
sells the Consumer Products and the Electronic Surveillance Products. For the
year ended December 31, 2003, revenues from the Consumer Products Division were
$2.8 million. For the five years prior to July 14, 2003, the Company was
prohibited from selling defense sprays to the law enforcement market, under a
non-competition agreement with Armor Holdings, Inc. We are now selling our
defense sprays in the law enforcement market under the brand name of Take
Down(R). We believe that the total consumer defense spray market is
approximately $10 million to $12 million in revenues a year and that the law
enforcement market is approximately $3 million in revenue per year. We do not
expect to be able to significantly increase our market share of the consumer
defense spray market. Though the Company has only recently begun its sales
efforts for the Electronic Surveillance Products Division, this division, which
commenced operations in August 2002, achieved growth in revenues from $380,000
in 2002 to $2.8 million of revenues in 2003. Growth has been principally
achieved through the development of an internal sales staff and increased
advertising and marketing efforts in 2003.
Operating Agreements and Acquisitions. During 2001, we did not directly
market or sell the Consumer Product Division's line of personal safety and
security devices. All marketing and sales were done by Mark Sport under a
Management Agreement. The Management agreement expired on April 30, 2002, at
which time the Company recommenced marketing efforts.
With the acquisition of certain of the assets of Micro-Tech, a manufacturer and
retailer of electronic security and surveillance devices on August 12, 2002, the
Company added the Electronic Surveillance Products Division to its Security
Products Segment. Additionally, we acquired the assets of Vernex, a manufacturer
and retailer of electronic security monitors, on September 26, 2003. At the
present time we are not evaluating or seeking to make any acquisitions for the
Security Products Segment. However, we would consider a Security Products
Segment acquisition if one became available on advantageous terms. In evaluating
potential acquisitions, we will consider: (i) our cash position and the
availability of financing at favorable terms; (ii) the potential for operating
cost reductions; (iii) marketing advantages by adding new products to the
Mace(R) brand name; (iv) market penetration of existing products; and (v) other
relevant factors.
As consideration for acquisitions, we may use combinations of common stock,
cash, and indebtedness. The consideration for each future acquisition will vary
on a case-by-case basis depending on our financial interests, the historic
operating results of the acquisition target, and the growth potential of the
business to be acquired. We expect to finance the cash portion of future
acquisitions through funds provided by operations, loans, and the proceeds of
possible future equity sales.
MARKETING
Car and Truck Wash Segment. The car care industry services customers on a local
and regional basis. We employ operational and customer service people at our
operating locations. The operational and customer service people are supervised
by the management of the operating locations. We emphasize providing quality
services as well as customer satisfaction and retention, and believe that we
will attract customers in the future because of our reputation for quality
service. We market our services through regional coupon advertising, direct-mail
marketing programs and radio and television advertisements. We spend 2% to 3% of
regional revenue on regional advertising campaigns. We have a diverse customer
base, with no single customer accounting for five percent or more of our
consolidated revenues for the fiscal year ended December 31, 2003. We do not
believe that the loss of any single customer would have a material adverse
effect on our business or results of operations.
Security Products Segment. During 2001, we did not directly market the
Consumer Products Division's line of personal safety and security devices. All
marketing and sales were done by Mark Sport under a Management Agreement until
it expired on April 30, 2002, at which time the Company recommenced marketing
efforts. The consumer products are available for purchase at mass
merchant/department stores, gun shops, sporting goods stores, hardware, auto,
convenience and drug stores. Each market category of the Consumer Products
Division is reached through dedicated in-house sales managers, and/or through a
nationwide network of manufacturers' representatives. Consumer products are also
available for purchase directly through a catalog, trade publication
advertising, an internet website, and promotions at industry trade shows. Mail
orders, internet orders, and specialty accounts are handled directly by the
Company.
Our marketing efforts for the Electronic Surveillance Products Division began in
2003. Our Electronic Surveillance Products Division contains two separate
product lines which are developed for two distinct markets: professional
installers who sell and install systems, and consumers who directly purchase the
equipment. The professional line is sold through dealer and distributor networks
which we are developing. Our consumer line is sold primarily through mass
merchants and spy shops. Our marketing efforts have increased sales from
$380,000 in 2002 (August through December) to $2.8 million in 2003; however, no
assurance can be given that our marketing will continue to increase sales at the
same rate.
5
PRODUCTION AND SUPPLIES
Car and Truck Wash Segment. We do not manufacture any of the car or
truck wash equipment and supplies which we use. There are numerous suppliers of
the equipment and supplies required by our car and truck wash operations.
Consumer Products Division. Substantially all of the manufacturing
processes for the Consumer Products Division are performed at our leased
Bennington, Vermont facility. Defense spray products are manufactured on an
aerosol filling machine. Most products are packaged in sealed, tamper-resistant
"clamshells." The KinderGard(R) product line and MaceCash dye pack system are
primarily manufactured by unrelated companies and packaged on-site at our
Vermont facility. There are numerous potential suppliers of the components and
parts required in the production process. We have developed strong long-term
relationships with many of our suppliers including the following: Moldamatic,
Inc., Amber International, Inc., and Springfield Printing, Inc. In addition, we
purchase for resale a variety of products produced by others including whistles
and window and door alarms, among others.
Electronic Surveillance Products Division. Our Electronic Surveillance
products are manufactured principally in Korea, China, and other foreign
countries, by original equipment manufacturers ("OEM"). The Electronic
Surveillance products are manufactured to our specifications, labeled, packaged,
and shipped ready for sale, to our warehouse in Hollywood, Florida.
COMPETITION
Car and Truck Wash Segment. The car care industry is a highly
fragmented industry comprised of many large and small businesses. At any of our
wash locations, our main competitors are privately-owned car washes which may,
in many instances, be located near our car washes. The car care industry is
highly competitive. Competition is based primarily on location, facilities,
customer service, available services and price. We also face competition from
sources outside the car wash industry, such as gas stations that offer automated
car wash services. Barriers to entry in the car care industry are relatively
low. Competition is always entering our existing markets from new sources not
currently competing with us. We compete principally with locally-owned car wash
facilities and other regional car wash chains including Wash Tub, Car Spa, and
Oasis Car Wash.
Security Products Segment. The Consumer Products Division faces
intense competition in the security products consumer market. Domestically,
there continues to be a number of companies marketing defense sprays to civilian
consumers. While we continue to offer defense spray products that we believe
distinguish themselves through brandname recognition and superior product
features and formulations, this division has experienced a sales decline for
these products. We attribute this decline not only to the strong competition,
but also to lower demand in general.
Our Electronic Surveillance Products Division faces competition from many larger
companies such as Sony, Panasonic, and others. A number of these competitors
have significantly greater financial, marketing, and other resources than do we.
We also compete with numerous well-established, smaller, local or regional
firms. Increased competition from these companies could have an adverse effect
on our Electronic Surveillance Products Division.
TRADEMARKS AND PATENTS
Car and Truck Wash Business. We own a registered service mark for Super
Bright(R). We have selected Super Bright(R) as our brandname for regions in
which we do not have a well recognized name. During 2002, we upgraded the
signage and appearance of many of our car wash facilities while branding our
Pennsylvania, San Antonio, and Lubbock locations as Super Bright(R).
Security Products Segment. Mace Security International, Inc. began
marketing products in 1993 under the Mace(R) brand name and related trademarks
pursuant to an exclusive license for sales of defense sprays to the consumer
market in the continental United States, and a non-exclusive license for sales
to the consumer market worldwide. The license agreement was renegotiated in 1992
to include a purchase option. We exercised this option and purchased outright
the Mace(R) brand name and related trademarks (Pepper Mace(R), Chemical Mace(R),
Mace . . . Just in Case(R), CS Mace(TM) and Magnum Mace(TM)). In conjunction
with this purchase, we acquired a non-exclusive worldwide license to promote a
patented pepper spray formula in both the consumer and law enforcement markets.
We also have various other patents and trademarks for the devices we sell,
including trademarks and/or patents for the Big Jammer(R) door brace, Window
Jammer(TM), Sonic Alert(TM), Safety Flasher(TM), Sport Strobe(TM), Child Safe
Alarm(TM), Window Alert(TM), Motion Alert(TM), Emergency Whistle(TM), Auto
Alert(TM), Screecher(R), Peppergard(R), Slam(R), Mace (Mexico)(R), Viper(R)
defense spray, KinderGard(R), Zip-a-Babe(R), Hand-n-Hand(R), Safe-T-Zip(R), TG
Guard(R), and Take Down(R). The TG Guard(R) Security Protection System is
designed to move disruptive inmates out of an affected area without sending in
correctional officers who could be harmed or taken hostage. TG Guard(R)
accomplishes this with a strategic arrangement of chemical agent dispensers
installed in ceiling or elevated fixtures. The system is capable of eliminating
internal or external disturbances at correctional facilities and other high
risk, high security facilities. Additionally, we have been issued a patent on
the locking mechanism for our Mark VI defense spray unit.
6
In July 1998, in connection with the sale of our Law Enforcement Division, we
transferred our Mace(R) brand trademark and all related trademarks, and a patent
(No. 5,348,193) to our wholly-owned subsidiary, Mace Trademark Corp. The
purchaser of our Law Enforcement division received a 99 year license to use the
Mace(R) brand, certain other such trademarks and the patent in the Law
Enforcement Market only.
The Company is in the process of completing appropriate filings to expand the
Mace(R) trademark to cover the new Electronic Surveillance products.
GOVERNMENT REGULATION/ENVIRONMENTAL COMPLIANCE
Car and Truck Wash Segment. We are subject to various local, state, and
federal laws regulating the discharge of pollutants into the environment. We
believe that our operations are in compliance, in all material respects, with
applicable environmental laws and regulations. Compliance with these laws and
regulations is not expected to materially affect our competitive position. Three
major areas of regulation facing us are disposal of lubrication oil at our oil
change centers, the compliance with all underground storage tank laws in
connection with our gasoline sales, and the proper recycling and disposal of
water used in our car and truck washes. We use approved waste-oil haulers to
remove our oil and lubricant waste. Before acquiring a gasoline dispensing site,
we investigate it to verify that any underground storage tanks are in compliance
with all legal requirements. We recycle our waste water and, where we have
proper permits, it is disposed of into sewage drains. Approximately 70% of the
water used in the car wash is recycled at sites where a built-in reclaim system
exists.
Security Products Segment. The distribution, sale, ownership, and use
of consumer defense sprays are legal in some form in all 50 states and the
District of Columbia. However, in most states, sales to minors are prohibited
and in several states (MA, MI, NY, WI), sales of defense sprays are highly
regulated. Massachusetts allows the sale of defense sprays by licensed firearm
dealers only. Michigan does not allow the sale of chloroacetophenone (CN) sprays
but does allow certain pepper and CS tear gas sprays which we sell to our
Michigan customers. New York allows the sale of defense sprays but only by
licensed firearm dealers or licensed pharmacists. Wisconsin allows the sale of
pepper sprays, but they must be sold behind the counter or under glass. We have
been able to sell our defense sprays within the guidelines set by state
regulations. There can be no assurance, however, that broader, more severe
restrictions will not be enacted that would have an adverse impact on the
results of our Consumer Products Division. We believe we are in material
compliance with all federal, state, and local environmental laws that affect our
business.
RESEARCH AND DEVELOPMENT
Car and Truck Wash Segment. There are no research and development
expenditures within the Car and Truck Wash Segment.
Security Products Segment. We have an on-site laboratory at our Vermont
facility where research and development is conducted to maintain our reputation
in the defense spray industry. We are continually reviewing ideas and potential
licensing arrangements to expand our product lines. We spent approximately
$5,000 and $4,000 on research and development in 2003 and 2002, respectively.
Our Electronic Surveillance products have been developed by our staff in
Hollywood, Florida, working in conjunction with certain OEM manufacturers. We
have spent approximately $6,000 in developing the Electronic Surveillance
products in each of 2003 and 2002.
7
INSURANCE
We maintain various insurance coverages for our assets and operations. These
coverages include Property coverages including business interruption protection
for each location. We maintain commercial general liability coverage in the
amount of $1 million per occurrence and $2 million in the aggregate with an
umbrella policy which provides coverage up to $25 million. We also maintain
workers' compensation policies in every state in which we operate. Commencing
July 2002, as a result of increasing costs of the Company's insurance program,
including auto, general liability, and workers' compensation coverage, we are
insured through participation in a captive insurance program with other
unrelated business. The Company maintains excess coverage through
occurrence-based policies. With respect to our auto, general liability, and
workers' compensation policies, we are required to set aside an actuarial
determined amount of cash in a restricted "loss fund" account for the payment of
claims under the policies. We expect to fund these accounts annually as required
by the insurance company. Should funds deposited exceed claims incurred and
paid, unused deposited funds are returned to us with interest on the third
anniversary of the policy year-end. The captive insurance program is further
secured by a letter of credit in the amount of $525,000 at December 31, 2003.
The Company records a monthly expense for losses up to the reinsurance limit per
claim based on the Company's tracking of claims and the insurance company's
reporting of amounts paid on claims plus their estimate of reserves for possible
future payments. There can be no assurance that our insurance will provide
sufficient coverage in the event a claim is made against us, or that we will be
able to maintain in place such insurance at reasonable prices. An uninsured or
under insured claim against us of sufficient magnitude could have a material
adverse effect on our business and results of operations.
U.S. BASED BUSINESS
All of our car and truck wash businesses are conducted in the United States.
Approximately 4% or $246,000 and 6% or $150,000 of the 2003 and 2002 revenues,
respectively, from our Security Products Segment were derived from customers
outside of the United States. Our Electronic Surveillance products are
manufactured in Korea, China, and other foreign countries. We do not believe we
are currently subject to any material risks associated with any foreign
operations.
EMPLOYEES
As of March 5, 2004, we had approximately 1,630 employees, of which
approximately 1,576 were employed in the Car and Truck Wash Segment, 32 employed
in the Security Products Segment, 18 in corporate clerical and administrative
positions, and four in executive management. None of our employees is covered by
a collective bargaining agreement.
FACTORS INFLUENCING FUTURE RESULTS AND ACCURACY OF FORWARD-LOOKING STATEMENTS
This report includes forward looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended ("Forward-Looking Statements"). All statements
other than statements of historical fact included in this report are
Forward-Looking Statements. Although we believe that the expectations reflected
in such Forward-Looking Statements are reasonable, we can give no assurance that
such expectations will prove to have been correct. Generally, these statements
relate to business plans or strategies, projected or anticipated benefits or
other consequences of such plans or strategies, number of acquisitions, and
projected or anticipated benefits from acquisitions made by or to be made by us,
or projections involving anticipated revenues, earnings, levels of capital
expenditures or other aspects of operating results. All phases of our operations
are subject to a number of uncertainties, risks, and other influences, many of
which are outside our control and any one of which, or a combination of which,
could materially affect the results of our operations and whether
Forward-Looking Statements made by us ultimately prove to be accurate. Such
important factors that could cause actual results to differ materially from our
expectations are disclosed in this section and elsewhere in this report. All
subsequent written and oral Forward-Looking Statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the important factors described below that could cause actual
results to differ from our expectations. The Forward- Looking Statements made
herein are only made as of the date of this filing, and we undertake no
obligation to publicly update such Forward-Looking Statements to reflect
subsequent events or circumstances.
Our business plan poses risks for us. Our business objectives include internally
developing our Electronic Surveillance Products Division and acquiring
additional car washes, if we can do so under advantageous terms. To date, we
have spent approximately $5.1 million in developing our Electronic Surveillance
Products Division including the acquisition costs of Micro-Tech and Vernex, the
purchase of our warehouse in Hollywood, Florida, and the cost of developing and
purchasing inventory for our branded product line. As part of our business plan
we may also develop or acquire additional car wash facilities. Our strategy
involves a number of risks, including:
8
i. risks associated with growth;
ii. risks associated with acquisitions and their integration into
our Company;
iii. risks associated with the recruitment and development of
management and operating personnel; and
iv. risks of not being able to sell the electronic surveillance
products in the quantities we have ordered from OEM
manufacturers.
If we are unable to manage one or more of these associated risks effectively, we
may not fully realize our business plan.
Risk related to borrowings. Our borrowings as of December 31, 2003 were
$31.3 million. Of the borrowings, $5.5 million is classified as current as it is
due in less than twelve months. Our business plan is dependent on refinancing
the debt as it becomes due. Several of our debt agreements, as amended, contain
certain affirmative and negative covenants and require the maintenance of
certain levels of tangible net worth and the maintenance of certain debt
coverage ratios on a consolidated level. At December 31, 2003, we were not in
compliance with our consolidated debt coverage ratio related to our GMAC notes
payable. With respect to the GMAC notes payable, the Company has received a
waiver of acceleration of the notes through January 1, 2005. Additionally, the
Company has entered into amendments to the Bank One term loan agreements as of
December 31, 2003. The Company is currently in compliance with these covenants
as amended. The Company initiated certain temporary and permanent cost savings
measures in March of 2003, including reductions in payroll expense and certain
operating costs to enable it to maintain compliance with the Bank One
consolidated debt coverage ratio. These savings through December 31, 2003
totaled approximately $425,000. Additional temporary and permanent cost saving
measures were intiated in March of 2004, including further reductions in payroll
expenses and certain operating costs, along with an increase in prices within
the Car and Truck Wash Segment to enable the Company to maintain compliance with
the Bank One consolidated debt coverage ratio. The amended debt coverage ratio
with Bank One requires the Company to maintain a consolidated earnings before
interest, taxes, depreciation and amortization ("EBITDA") to debt service
(collectively " the debt coverage ratio") of 1.1 to 1 at December 31, 2003 and
in the future. As of March 11, 2004, the preliminary operating results for the
quarter ended March 31, 2004 indicate that we should meet the Bank One required
debt coverage ratio as of March 31, 2004; however, we cannot provide assurance
that favorable operating trends will continue through March 31, 2004. If we
default on any of the Bank One covenants or the GMAC covenant in the future, the
Company will need to obtain further amendments or waivers from these lenders. If
the Company is unable to obtain waivers or amendments in the future, Bank One
debt totaling $14.9 million and GMAC debt totaling $11.6 million recorded as
long-term debt at December 31, 2003 would become due on demand.
The Company's ongoing ability to comply with its debt covenants under its credit
arrangements and refinance its debt depend largely on the achievement of
adequate levels of cash flow. Our cash flow has been and can continue to be
adversely affected by weather patterns and the economic climate. In the event
that non-compliance with the debt covenants should reoccur, the Company would
pursue various alternatives to successfully resolve the non-compliance, which
might include, among other things, seeking additional debt covenant waivers or
amendments, or refinancing debt with other financial institutions. Although the
Company believes that it would be successful in resolving potential
non-compliance with its debt covenants, or refinancing its current debt, there
can be no assurance that further debt covenant waivers or amendments would be
obtained or that the debt would be refinanced with other financial institutions
on favorable terms. If we are unable to obtain renewals of our loans or
refinancings on favorable terms, our ability to operate would be materially and
adversely affected.
Our operations are dependent substantially on the services of our
executive officers. If we lose one or more of our executive officers and do not
replace them with experienced personnel, the loss could have a material adverse
effect on our business and results of operations. We do not maintain key-man
life insurance policies on our executive officers. The primary terms of the
employment agreements of Robert M. Kramer, Gregory M. Krzemien, and Ronald R.
Pirollo expired on March 26, 2003. Louis D. Paolino, Jr. and the Company have
executed an employment agreement which has a term through August 12, 2006.
Messrs. Kramer and Krzemien are working on a month-to-month at-will basis. Mr.
Pirollo or the Company may terminate Mr. Pirollo's employment at any time. Mr.
Paolino is the Company's Chief Executive Officer; Mr. Kramer is the Company's
Chief Operating Officer, General Counsel and Secretary; Mr. Krzemien is the
Company's Chief Financial Officer and Treasurer; and Mr. Pirollo is the
Company's Chief Accounting Officer and Corporate Controller.
We have reported net losses. We have reported net losses and working
capital deficits, and we have expended substantial funds for acquisitions,
equipment, and new business development. With the adoption of Statement of
Financial Accounting Standards ("SFAS") 142, Goodwill and Other Intangible
Assets on January 1, 2002, we no longer amortize goodwill and certain intangible
assets determined to have indefinite useful lives. Additionally, SFAS 142
requires annual fair value based impairment tests of goodwill and other
intangible assets identified with indefinite useful lives. The Company cannot
guarantee that there will not be impairments in subsequent reporting periods
that will have a material impact on earnings and equity of the Company. (See
also Note 3, Change in Accounting Principle in the Notes to Consolidated
Financial Statements.)
9
We have a limited operating history regarding our Electronic
Surveillance Products Division. We recently expanded our line of security
products by adding the Electronic Surveillance Products Division. We are
incurring expenses to develop the new line of products without having
extensively tested the size or possible profitability of the market for such
products. There are numerous risks associated with the new Electronic
Surveillance Products Division that may prevent the Company from selling them
profitable, including, among others: risks associated with unanticipated
problems in the acquired companies; risks inherent with our management having
limited experience in electronic security device product; risks relating to the
size and number of competitors in the electronic security product market, many
of whom may be more experienced or better financed; risks associated with the
costs of planned entry into new markets and expansion of product lines in old
markets; and risks attendant to locating and maintaining reliable sources of OEM
products and component supplies in the electronic surveillance industry. We also
expect that there will be costs related to product returns and warranties and
customer support that we cannot quantify or accurately estimate until we have
more experience in operating the new business.
We may not be able to manage growth. If we succeed in growing, it will
place significant burdens on our management and on our operational and other
resources. We will need to attract, train, motivate, retain, and supervise our
senior managers and other employees. If we are unable to do this, we will not be
able to realize our business objectives.
Our car wash business may suffer under certain weather conditions.
Seasonal trends in some periods may affect our car wash business. In particular,
long periods of rain and cloudy weather can adversely affect our car wash
business as people typically do not wash their cars during such periods.
Additionally, extended periods of warm, dry weather may encourage customers to
wash their cars themselves which also can adversely affect our car wash
business.
We face significant competition. The extent and kind of competition
that we face varies. The car care industry is highly competitive. Competition is
based primarily on location, facilities, customer service, available services
and price. Because barriers to entry into the car care industry are relatively
low, competition may be expected to continually arise from new sources not
currently competing with us. We also face competition from outside the car care
industry, such as gas stations and convenience stores that offer automated car
wash services. In some cases, these competitors may have greater financial and
operating resources than do we. In our car wash business, we face competition
from a number of sources, including regional and national chains, gasoline
stations, gasoline companies, automotive companies and specialty stores, both
regional and national.
Consumer demand for our car wash services is unpredictable. Our
financial condition and results of operations will depend substantially on
continued consumer demand for car wash services. Our car wash business depends
on consumers choosing to employ professional services to wash their cars rather
than washing their cars themselves or not washing their cars at all. We cannot
give assurance that consumer demand for car wash services will increase in the
future, nor can we give assurance that consumer demand will maintain its current
level.
We must maintain our car wash equipment. Although we undertake to keep
our car washing equipment in proper operating condition, the operating
environment in car washes results in frequent mechanical problems. If we fail to
properly maintain the equipment, any car wash could become inoperable resulting
in a loss of revenue. Many of our car washes have older equipment which requires
frequent repair or replacement.
We must operate our locations safely. Our Consumer Products Division
and Car and Truck Wash Segment utilize harsh chemicals in their operations.
Though we train our personnel in safety, there is a risk of injury to our
employees.
We face risks associated with significant insurance claims. We maintain
various insurance coverages for our assets and operations. These coverages
include Property coverages including business interruption protection for each
location. We maintain commercial general liability coverage in the amount of $1
million per occurrence and $2 million in the aggregate with an umbrella policy
which provides coverage up to $25 million. We also maintain workers'
compensation policies in every state in which we operate. Commencing July 2002,
as a result of increasing costs of the Company's insurance program, including
auto, general liability, and workers' compensation coverage, we are insured
through participation in a captive insurance program with other unrelated
business. The Company maintains excess coverage through occurrence-based
policies. With respect to our auto, general liability, and workers' compensation
policies, we are required to set aside an actuarial determined amount of cash in
a restricted "loss fund" account for the payment of claims under the policies.
We expect to fund these accounts annually as required by the insurance company.
Should funds deposited exceed claims incurred and paid, unused deposited funds
are returned to us with interest on the third anniversary of the policy
year-end. The captive insurance program is further secured by a letter of credit
in the amount of $525,000 at December 31, 2003. If our loss experience is worse
than expected, our cash assessments to the captive may be increased in the
future. The Company records a monthly expense for losses up to the reinsurance
limit per claim based on the Company's tracking of claims and the insurance
company's reporting of amounts paid on claims plus their estimate of reserves
for possible future payments. There can be no assurance that our insurance will
provide sufficient coverage in the event a claim is made against us, or that we
will be able to maintain in place such insurance at reasonable prices. An
uninsured or under insured claim against us of sufficient magnitude could have a
material adverse effect on our business and results of operations.
10
Our car and truck wash operations face governmental regulations. We are
governed by federal, state and local laws and regulations, including
environmental regulations, that regulate the operation of our car wash centers
and other car care services businesses. Other car care services, such as
gasoline and lubrication, use a number of oil derivatives and other regulated
hazardous substances. As a result, we are governed by environmental laws and
regulations dealing with, among other things:
i. transportation, storage, presence, use, disposal, and
handling of hazardous materials and wastes;
ii. discharge of storm water; and
iii. underground storage tanks.
If uncontrolled hazardous substances were found on our property, including
leased property, or if we were found to be in violation of applicable laws and
regulations, we could be responsible for clean-up costs, property damage, and
fines, or other penalties, any one of which could have a material adverse effect
on our financial condition and results of operations.
We face risks associated with our consumer safety products. We face
claims of injury allegedly resulting from our defense sprays. For example, we
are aware of allegations that defense sprays used by law enforcement personnel
resulted in deaths of prisoners and of suspects in custody. In the event a
lawsuit is brought against us, we cannot give assurance that our insurance
coverage will be sufficient to cover any judgments won. If our insurance
coverage is exceeded, we will have to pay the excess liability directly.
Listing on the Nasdaq National Market. Our common stock is listed on
the Nasdaq National Market with a bid price of $2.11 at the close of the market
on March 10, 2004. If the price of our common stock falls below $1.00 and for 30
consecutive days remains below $1.00, we are subject to being delisted from the
Nasdaq National Market. Upon delisting from the Nasdaq National Market, our
stock would be traded on the Nasdaq SmallCap Market until we maintain a minimum
bid price of $1.00 for 30 consecutive days at which time we can regain listing
on the Nasdaq National Market. If our stock fails to maintain a minimum bid
price of one dollar for 30 consecutive days during a 180 day grace period on the
Nasdaq SmallCap Market or a 360 day grace period if compliance with certain core
listing standards are demonstrated, we could receive a delisting notice from the
Nasdaq SmallCap Market. Upon delisting from the Nasdaq SmallCap Market, our
stock would be traded over-the-counter, more commonly known as OTC. OTC
transactions involve risks in addition to those associated with transactions in
securities traded on the Nasdaq National Market or the Nasdaq SmallCap Market
(together "Nasdaq-Listed Stocks"). OTC companies may have limited product lines,
markets or financial resources. Many OTC stocks trade less frequently and in
smaller volumes than Nasdaq-Listed Stocks. The values of these stocks may be
more volatile than Nasdaq-Listed Stocks. If our stock is traded in the OTC
market and a market maker sponsors us, we may have the price of our stock
electronically displayed on the OTC Bulletin Board, or OTCBB. However, if we
lack sufficient market maker support for display on the OTCBB, we must have our
price published by the National Quotations Bureau LLP in a paper publication
known as the "Pink Sheets." The marketability of our stock will be even more
limited if our price must be published on the "Pink Sheets."
On October 2, 2002, Nasdaq advised us that our common stock failed to maintain a
minimum bid price of $1.00 over the prior 30 consecutive trading days as
required by the Nasdaq National Market under its Marketplace Rules. Nasdaq
advised us that we had 90 days to maintain a bid price of at least $1.00 for 10
consecutive business days or we would be delisted. The Company maintained a
minimum bid price of at least $1.00 for 10 consecutive business days ending
December 24, 2002, in part by completing a one-for-two reverse stock split on
December 17, 2002. On December 30, 2002, Nasdaq advised us that we are in
compliance with Market Place Rule 4450(a)(5) and are not subject to being
delisted.
11
Our stock price is volatile. Our common stock's market price has been
volatile. Factors like fluctuations in our quarterly revenues and operating
results, our acquisition program, market conditions, and economic conditions
generally may impact significantly our common stock's market price. In addition,
if we make an acquisition, we may agree to issue common stock that will become
available for resale and may have an impact on our common stock's market price.
Our preferred stock may affect the rights of the holders of our common
stock; it may also discourage another entity from acquiring control of Mace. Our
Certificate of Incorporation authorizes the issuance of up to 10 million shares
of preferred stock. No shares of preferred stock are currently outstanding. It
is not possible to state the precise effect of preferred stock upon the rights
of the holders of our common stock until the Board of Directors determines the
respective preferences, limitations and relative rights of the holders of one or
more series or classes of the preferred stock. However, such effect might
include: (i) reduction of the amount otherwise available for payment of
dividends on common stock, to the extent dividends are payable on any issued
shares of preferred stock, and restrictions on dividends on common stock if
dividends on the preferred stock are in arrears, (ii) dilution of the voting
power of the common stock to the extent that the preferred stock has voting
rights, and (iii) the holders of common stock not being entitled to share in our
assets upon liquidation until satisfaction of any liquidation preference granted
to the preferred stock.
The preferred stock may be viewed as having the effect of discouraging an
unsolicited attempt by another entity to acquire control of us and may therefore
have an anti-takeover effect. Issuances of authorized preferred stock can be
implemented, and have been implemented by some companies in recent years with
voting or conversion privileges intended to make an acquisition of a company
more difficult or costly. Such an issuance could discourage or limit the
stockholders' participation in certain types of transactions that might be
proposed (such as a tender offer), whether or not such transactions were favored
by the majority of the stockholders, and could enhance the ability of officers
and directors to retain their positions.
Some provisions of Delaware law may prevent us from being acquired. We
are governed by Section 203 of the Delaware General Corporation Law, which
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an entity who is an "interested stockholder" for a period of
three years, unless approved in a prescribed manner. This provision of Delaware
law may affect our ability to merge with, or to engage in other similar
activities with, some other companies. This means that we may be a less
attractive target to a potential acquirer who otherwise may be willing to pay a
price for our common stock above its market price.
We do not expect to pay cash dividends on our common stock. We do not
expect to pay cash dividends on our common stock in the foreseeable future. We
will reinvest in our business any cash otherwise available for dividends.
There are additional risks set forth in the incorporated documents. In
addition to the risk factors set forth above, you should review the financial
statements and exhibits incorporated into this report. Such documents may
contain, in certain instances and from time to time, additional and supplemental
information relating to the risks set forth above and/or additional risks to be
considered by you, including, without limitation, information relating to losses
experienced by us in certain historical periods, working capital deficits at
particular dates, information relating to pending and recently completed
acquisitions, descriptions of new or changed federal or state regulations
applicable to Mace, data relating to remediation and the actions taken by Mace,
and estimates at various times of Mace's potential liabilities for compliance
with environmental laws or in connection with pending litigation.
ITEM 2. DESCRIPTION OF PROPERTIES
Our corporate headquarters is located in Mount Laurel, New Jersey. We rent
approximately 10,000 square feet of space at a current annual cost of
approximately $216,000.
Car and Truck Wash Properties. Our principal fixed assets are our car
wash facilities used for performing car care services which are described under
Item 1. Lines of Business. The 51 car wash facilities operated by us as of
December 31, 2003 are situated on sites we own or lease. We own 41 and lease 10
of our car wash facilities. The locations of our car washes and the services
offered at the locations are set forth in summary fashion in the chart below.
Type of Number of
Locations (1) Car Wash (2) Facilities
------------ ------------ ----------
Philadelphia, Pennsylvania Full Service 3
Area Exterior Washes 3
Southern New Jersey Area Full Service 1
12
Exterior Washes 5
Smyrna, Delaware Exterior Wash 1
Phoenix, Arizona Area Full Service 13
Dallas, Texas Area Full Service 8
Self Serve 1
/Lube
Austin, Texas Full Service 3
Lubbock, Texas Full Service 3
Sarasota, Florida Area Full Service 6
San Antonio, Texas Full Service 4
(1) The majority of our locations are owned except for the following number of
locations which are leased:
(1) Philadelphia, Pennsylvania (3)
(2) Smyrna, Delaware (1)
(3) Phoenix, Arizona Area (4)
(4) Dallas, Texas Area (2)
(2) Several locations also offer other consumer products and related car care
services, such as professional detailing services (offered at 41
locations), oil and lubrication services (offered at 10 locations),
gasoline dispensing services (offered at 19 locations), state inspection
services (offered at seven locations), convenience store sales (offered at
one location) and merchandise store sales (offered at 41 locations).
We own real estate, buildings, equipment, and other properties that we employ in
substantially all of our car washes. We expect to make substantial investments
in additional equipment and property for expansion, replacement of assets, and
in connection with future acquisitions.
Many of our car washes are encumbered by first mortgage loans. Of the 51 car
washes owned or leased by us at December 31, 2003, 26 properties secured first
mortgage loans totaling $29.9 million and 25 were not encumbered.
We also own and operate five truck wash facilities. We own the buildings and
equipment at each of our truck washes, and lease the land for all of our truck
wash facilities except for the Amarillo, Texas land which we own and which is
encumbered by debt of $313,000 at December 31, 2003.
Security Products Segment Properties. The operations of our Consumer
Products Division, including administration and sales, and all of its production
facilities are located in Bennington, Vermont. Commencing May 1, 2002, we leased
approximately 44,000 square feet of space in a building from Vermont Mill
Properties, Inc. ("Vermont Mill") at an annual cost of $110,000. Vermont Mill is
controlled by Jon E. Goodrich, a director of the Company through December, 2003
and President of Mark Sport. The operations of our recently acquired Electronic
Surveillance Products Division are located in Hollywood, Florida. In November
2002, we purchased a 6,700 square foot building consisting of inventory
warehouse space and future office space for administrative and sales functions.
In October 2003, we purchased an additional 3,750 square feet of warehouse and
office space adjacent to the 6,700 square foot facility. The Hollywood, Florida
facility is secured by a first mortgage loan in the amount of $714,000 at
December 31, 2003. Prior to purchasing the Hollywood, Florida facility, we
rented 1,000 square feet of space at a rate of approximately $1,400 per month.
ITEM 3. LEGAL PROCEEDINGS
In December 1999, the Company was named as a defendant in a suit filed in the
Supreme Court of the State of New York by Janeen Johnson et. al. The litigation
concerns a claim that a self-defense spray manufactured by the Company and used
by a law enforcement officer contributed to the suffering and death of
Christopher Johnson. The Company forwarded the suit to its insurance carrier for
defense. The Company does not anticipate that this claim will result in the
payment of damages in excess of the Company's insurance coverage.
13
In 2000, the Company was named as a defendant in a suit filed in the United
States District Court for the District of Colorado by Robert Rifkin. The suit
alleges that the Company and its transfer agent delayed in the removal of a
restrictive legend from certain shares of Company common stock owned by the
plaintiff, and that the delay caused the plaintiff to incur a loss in excess of
$335,000. Though the outcome of litigation is always uncertain, the Company
believes that there was no delay in the removal of the legend from the shares.
In July 2001, the Company filed a lawsuit in the Supreme Court of New York
County of the State of New York against LTV Networks, Inc. ("LTV") to collect
upon a promissory note in the amount of $100,000. In January 2002, defendant LTV
filed an answer to the suit denying liability under the promissory note and
making counterclaims. The counterclaims allege that the Company had agreed to
lend LTV $500,000 and that LTV has been damaged in the amount of $10 million
because the Company only lent $100,000 to LTV. The Company has filed a summary
judgment motion which requests a judgment on the promissory note and a dismissal
of the defendant's counterclaims. On August 29, 2003, LTV filed a Voluntary
Petition for Chapter 11 Reorganization in the United States Bankruptcy Court,
Southern District of New York (the "Petition"). The Petition had the effect of
operating as a stay on the State Court proceedings. The Bankruptcy Court lifted
the stay in the first quarter of 2004, enabling the Company to proceed with its
summary judgment motion. Though the outcome of litigation is always uncertain,
the Company currently believes that the counterclaims are without merit and
intends to assert its claims in the Bankruptcy proceedings.
In October 2001, the Company was named as an additional party defendant in a
suit filed by Alan Berndt and Martha Berndt in the United States District Court
for the Northern District of California. The litigation alleges the Company was
responsible for personal injuries arising out of Mr. Berndt's use of a Gas
Launcher. This suit has been settled within the limits of our insurance
coverage.
In May 2002, the Company was named as one of three defendants in a suit filed by
Timothy Gamradt and Carla Gamradt in the United States District Court for the
District of Minnesota. The litigation alleges that the plaintiffs are entitled
to damages against the Company due to injuries allegedly sustained by Mr.
Gamradt when a pyrotechnic smoke device known as the "Black Smoke Device" was
discharged by Mr. Gamradt's superior during a training exercise at a federal
prison facility at which Mr. Gamradt was employed as a guard. Mr. Gamradt
alleges that when the device was activated, he suffered injuries to his lungs.
We have forwarded the suit to our insurance carrier for defense. We do not
anticipate that this claim will result in the payment of damages in excess of
our insurance coverage.
In July 2002, the Company and its former president, Jon Goodrich, were named as
defendants in a lawsuit in the Supreme Court of New York County of the State of
New York filed by Armor Holdings, et al. The suit alleges that the Company and
Mr. Goodrich had violated the non-compete terms of various agreements entered
into in April 1998, which transferred certain of the Company's then lines of
business to the plaintiffs. The suit also alleges that the Company violated a
right of first refusal on sale granted to plaintiffs when the Company entered
into a Management Agreement with Mark Sport to operate the Company's Consumer
Products Division. The lawsuit requests $15 million in damages. Though the
outcome of litigation is always uncertain, the Company believes that all of the
claims are without merit.
In December 2003, one of the Company's car wash subsidiaries was named as a
defendant in a suit filed by Kristen Sellers in the Circuit Court of the Twelfth
Judicial Circuit in and for Sarasota County, Florida. The suit alleges that the
plaintiff is entitled to damages due to psychological injury and emotional
distress sustained when an employee of the car wash allegedly assaulted Ms.
Sellers with sexually explicit acts and words. The Company's subsidiary is
alleged to have been negligent in hiring, retaining and supervising the
employee. The Company forwarded the suit to its insurance carrier for defense.
We do not anticipate that this claim will result in the payment of damages in
excess of the Company's insurance coverage.
The Company has produced documents requested in a subpoena issued in connection
with an investigation being conducted by the United States Securities and
Exchange Commission of possible securities law violations. The subpoena was
issued on October 27, 2003. The subpoena requested documents and information
which would identify persons who knew of two transactions involving the Company
prior to Mace's public announcement of the transactions. The transactions were
announced by Mace on March 29, 1999 and were consummated in July of 1999. The
subpoena also requested documents relating to Mace's dealings with two
investment banking firms and certain of their employees. Mace intends to fully
cooperate with the United States Securities and Exchange Commission's
investigation.
14
The Company is a party to various other legal proceedings related to its normal
business activities. In the opinion of the Company's management, none of these
proceedings is material in relation to the Company's results of operations,
liquidity, cash flows or financial condition.
Although the Company is not aware of any substantiated claim of permanent
personal injury from its products, the Company is aware of reports of incidents
in which, among other things; defense sprays have been mischievously or
improperly used, in some cases by minors; have not been instantly effective; or
have been ineffective against enraged or intoxicated individuals.
The Company is subject to federal and state environmental regulations, including
rules relating to air and water pollution and the storage and disposal of oil,
other chemicals and waste. The Company believes that it complies, in all
material respects, with all applicable laws relating to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Stockholders of Mace Security International, Inc. was
held on December 19, 2003. The following proposals were submitted to a vote:
(i) to approve an amendment of the Mace Amended and Restated Certificate of
Incorporation to implement staggered director terms;
(ii) to approve for election of two Directors; for (a) one year term, if
proposal (i) is not approved or (b) staggered terms by class of Directors;
(iii) to approve an amendment of the Mace Amended and Restated Certificate of
Incorporation to provide for the filling of any vacancies or new positions
on the Board of Directors by a majority of the remaining directors;
(iv) to approve an amendment of the Mace Amended and Restated Certificate of
Incorporation to provide procedures that stockholders must follow in order
to nominate directors;
(v) to approve an amendment of the Mace Amended and Restated Certificate of
Incorporation to provide that the amendment, repeal or adoption of any
provision inconsistent with Proposals (i),(iii),(iv) or (v) only occur on
the affirmative vote of at least two-thirds (2/3) of the outstanding shares
of the common stock;
(vi) to approve an amendment of the Mace Amended and Restated Certificate of
Incorporation to decrease authorized shares;
(vii) to approve an amendment of the Mace Amended and Restated Certificate of
Incorporation to provide notice of stockholder proposals; and
(viii) to ratify the Board's appointment of Grant Thornton LLP as Mace's
independent auditors for fiscal year 2003.
Proposals (ii) and (viii) were adopted by the shareholders. The voting was as
follows:
Directors: Votes For Votes Against Abstentions Broker Non-Votes
Louis D. Paolino, Jr. 7,716,277 3,709,522 - -
Mark S. Alsentzer 7,653,627 3,772,172 - -
Matthew J. Paolino 7,716,277 3,709,522 - -
Constantine N. Papadakis, Ph.D 7,716,327 3,709,472 - -
Burton Segal 7,688,477 3,737,322 - -
15
Approve and adopt the amendment
of the Mace Amended and Restated
Certificate of Incorporation to
implement staggered director terms 3,807,869 4,226,650 1,525 3,389,755
Approve and adopt the amendment of the
Mace Amended and Restated Certificate of
Incorporation to provide for the filling
of any vacancies or new positions on
the Board of Directors by a majority
of the remaining directors 3,719,006 4,314,913 2,125 3,389,755
Approve and adopt the amendment of the
Mace Amended and Restated Certificate of
Incorporation to provide procedures that
stockholders must follow in order to
nominate directors 3,774,670 4,220,025 41,349 3,389,755
Approve and adopt the amendment of the
Mace Amended and Restated Certificate of
Incorporation to provide that the
amendment, repeal or adoption of any
provision inconsistent with Proposal
(i),(iii),(iv) or (v) only occur on the
affirmative vote of at least two-thirds
(2/3) of the outstanding shares of the
common stock 3,775,895 4,258,174 1,975 3,389,755
Approve and adopt amendment of the
Mace Amended and Restated
Certificate of Incorporation
to decrease authorized shares 5,243,578 2,790,841 1,625 3,389,755
Approve and adopt amendment of the
Mace Amended and Restated
Certificate of Incorporation to provide
notice of the stockholder proposals 3,812,219 4,222,150 1,675 3,389,755
Ratify appointment of Grant
Thornton LLP 9,088,357 2,334,917 2,525 -
16
Executive Officers of the Registrant
The following information is furnished in this Part I pursuant to Instruction 3
to Item 401(b) of Regulation S-K:
There are no family relationships between any of the executive officers of the
Company. The following table sets forth information regarding of our executive
officers.
Name Age Position
Louis D. Paolino, Jr............................. 47 Chairman of the Board, President, and Chief
Executive Officer
Robert M. Kramer................................. 51 Executive Vice President, Chief Operating Officer,
General Counsel, and Secretary
Gregory M. Krzemien.............................. 44 Chief Financial Officer and Treasurer
Ronald R. Pirollo................................ 45 Chief Accounting Officer and Corporate Controller
Louis D. Paolino, Jr. has served as the Chairman of the Board, President and
Chief Executive Officer of the Company since May 1999. From June 1996 through
December 1998, Mr. Paolino served as Chairman of the Board, President and Chief
Executive Officer of Eastern Environmental Services, Inc. Prior thereto, he was
President of Soil Remediation of Philadelphia, Inc., a company engaged in the
business of treating contaminated soil. From September 1993 to June 1996, Mr.
Paolino served as a Vice President of USA Waste Services, Inc. From November
1995 to January 1996, Mr. Paolino served on the Board of Directors of Metal
Management, Inc., formerly known as General Parametrics Corp., a publicly traded
company. Mr. Paolino received a B.S. in Civil Engineering from Drexel
University. Mr. Paolino is 47 years old.
Robert M. Kramer has served as Executive Vice President, General Counsel, and
Secretary of the Company since May 1999, and as Chief Operating Officer since
July 2000. Mr. Kramer also served as a director of the company from May 1999 to
December 2003. From June 1996 through December 1998, he served as General
Counsel, Executive Vice President and Secretary of Eastern Environmental
Services, Inc. Mr. Kramer is an attorney and has practiced law since 1979 with
various firms, including Blank Rome Comisky & McCauley, Philadelphia,
Pennsylvania, and Arent Fox Kitner Poltkin & Kahn, Washington, D.C. From 1989 to
December 2000, Mr. Kramer had been the sole partner of Robert M. Kramer &
Associates, P.C., a law firm which consisted of three lawyers. From December
1989 to December 1997, Mr. Kramer served on the Board of Directors of American
Capital Corporation, a registered securities broker dealer. Mr. Kramer received
B.S. and J.D. degrees from Temple University. Mr. Kramer is 51 years old.
Gregory M. Krzemien has served as the Chief Financial Officer and Treasurer of
the Company since May 1999. From August 1992 through December 1998, he served as
Chief Financial Officer and Treasurer of Eastern Environmental Services, Inc.
From October 1988 to August 1992, Mr. Krzemien was a senior audit manager with
Ernst & Young LLP. Mr. Krzemien received a B.S. degree in Accounting from the
Pennsylvania State University and is a certified public accountant. Mr. Krzemien
is 44 years old.
Ronald R. Pirollo has served as Chief Accounting Officer and Corporate
Controller of the Company since May 1999. Mr. Pirollo served as Vice President
and Corporate Controller of Eastern Environmental Services, Inc. from July 1997
to June 1999. Prior thereto, Mr. Pirollo was with Envirite Corporation for ten
years, where he served in various financial management positions including Vice
President - Finance. Mr. Pirollo received a B.S. degree in Accounting and an MBA
from Villanova University. Mr. Pirollo is 45 years old.
17
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Price and Dividends of the Registrant's Common Equity
Our common stock is traded in the over-the-counter market and quoted on the
Nasdaq National Market under the trading symbol "MACE". Common stock price
reflects inter-dealer quotations, does not include retail markups, markdowns or
commissions and does not necessarily represent actual transactions.
The following table sets forth, for the quarters indicated, the high and low
sale prices per share for our common stock, as reported by Nasdaq.
On December 17, 2002, we effected a one-for-two reverse stock split. All
information in the table below preceding the reverse split has been restated for
the reverse split.
HIGH LOW
Year Ended December 31, 2002
First Quarter........... $2.88 $1.26
Second Quarter.......... 2.58 1.82
Third Quarter........... 2.18 1.50
Fourth Quarter.......... 3.00 1.00
Year Ended December 31, 2003
First Quarter........... $2.04 $0.88
Second Quarter.......... 1.73 1.02
Third Quarter........... 2.06 1.25
Fourth Quarter.......... 2.62 1.55
Year Ended December 31, 2004
First Quarter........... $2.29 $1.81
(through March 10, 2004)
The closing price for our common stock on March 10, 2004 was $2.11. For purposes
of calculating the aggregate market value of our shares of common stock held by
non-affiliates, as shown on the cover page of this report, it has been assumed
that all the outstanding shares were held by non-affiliates except for the
shares held by our directors and executive officers and stockholders owning 10%
or more of our outstanding shares. However, this should not be deemed to
constitute an admission that all such persons are, in fact, non-affiliates of
the Company, or that there are not other persons who may be deemed to be
affiliates of the Company. For further information concerning ownership of our
securities by executive officers, directors and principal stockholders, see Item
12, Security Ownership of Certain
Beneficial Owners and Management.
As of March 10, 2004, we had 192 stockholders of record and approximately 1,342
beneficial owners of our common stock. We do not anticipate paying any cash
dividends in the foreseeable future and intend to retain all working capital and
earnings, if any, for use in our operations and in the expansion of our
business. Any future determination with respect to the payment of dividends will
be at the discretion of our Board of Directors and will depend upon, among other
things, our results of operations, financial condition and capital requirements,
the terms of any then existing indebtedness, general business conditions, and
such other factors as our Board of Directors deems relevant. Certain of our
credit facilities prohibit or limit the payment of cash dividends without prior
bank approval.
Equity Compensation Plan Information
See the information contained under the heading "Equity Compensation Plan
Information" within Item 11 of this Form 10-K regarding shares authorized for
issuance under equity compensation plans approved by stockholders and not
approved by stockholders.
(b) Recent Sales of Unregistered Securities
None.
18
ITEM 6. SELECTED FINANCIAL DATA
The information below was derived from our Consolidated Financial Statements
included in this report and in reports we have previously filed with the SEC.
This information should be read together with those financial statements and the
Notes to the Consolidated Financial Statements. For more information regarding
this financial data, see the Management's Discussion and Analysis of Financial
Condition and Results of Operations section also included in this report.
Statement of Operations Data: Year ended December 31,
-------------------------------------------------------------------
2003 2002 2001 2000 1999
==== ==== ==== ==== ====
(In thousands, except share information)
Revenues:
Car wash and detailing services $ 35,655 $ 36,696 $ 39,859 $ 37,812 $ 17,073
Lube and other automotive services 4,147 4,219 4,487 4,869 2,693
Fuel and merchandise sales 3,613 3,217 3,638 5,061 2,092
Security products sales 5,581 2,498 - - 3,435
Operating agreements - 80 240 261 463
------ ------ ------ ------ ------
48,996 46,710 48,224 48,003 25,756
Cost of revenues:
Car wash and detailing services 25,983 25,674 27,417 26,856 11,137
Lube and other automotive services 3,188 3,301 3,446 3,789 1,992
Fuel and merchandise sales 3,156 2,802 3,234 4,472 1,708
Security products sales 3,485 1,523 - - 1,818
------ ------ ------ ------ ------
35,812 33,300 34,097 35,117 16,655
Selling, general and administrative expenses 9,486 8,432 7,366 7,303 5,753
Depreciation and amortization 1,958 1,953 2,813 2,467 1,096
Costs of terminated acquisitions - 57 135 580 -
Merger costs - - - - 1,875
Restructuring, asset impairment and change in control
charges 3,798 1,165 - 138 1,519
------ ------ ------ ------ ------
Operating (loss) income (2,058) 1,803 3,813 2,398 (1,142)
Interest expense, net (1,963) (2,219) (2,885) (3,013) (1,033)
Other income 438 327 514 408 205
(Loss) income from continuing operations before income ------ ------ ------ ------ ------
taxes (3,583) (89) 1,442 (207) (1,970)
Income tax (benefit) expense (50) (32) 534 (66) (619)
------ ------ ------ ------ ------
(Loss) income from continuing operations (3,533) (57) 908 (141) (1,351)
Discontinued Operations:
(Loss) gain from discontinued operations, net of
applicable income taxes - - - (265) 91
Gain on disposal of ICS, net of applicable income tax - - - 724 -
expense ------ ------ ------ ------ ------
(Loss) income before cumulative effect of change in
accounting principle (3,533) (57) 908 318 (1,260)
Cumulative effect of change in accounting principle,
net of tax benefit of $2,188 - (5,733) - - -
------ ------ ------ ------ ------
Net (loss) income $ (3,533) $ (5,790) $ 908 $ 318 $ (1,260)
============ ============ ============ ============ ============
Basic (loss) income per share
From continuing operations $ (0.28) $ - $ 0.07 $ (0.01) $ (0.20)
From discontinued operations - - - 0.04 0.01
(Loss) income before cumulative effect of change in (0.28) - 0.07 0.03 (0.19)
accounting principle
Cumulative effect of change in accounting principle - (0.46) - - -
------ ------ ------ ------ ------
Net (loss) income $ (0.28) $ (0.46) $ 0.07 $ 0.03 $ (0.19)
============ ============ ============ ============ ============
Weighted average number of shares outstanding 12,414,816 12,630,964 12,724,282 12,238,421 6,579,577
============ ============ ============ ============ ============
Diluted (loss) income per share
From continuing operations $ (0.28) $ - $ 0.07 $ (0.01) $ (0.20)
From discontinued operations - - - 0.04 0.01
(Loss) income before cumulative effect of change in ------ ------ ------ ------ ------
accounting principle (0.28) - 0.07 0.03 (0.19)
Cumulative effect of change in accounting principle - (0.46) - - -
------ ------ ------ ------ ------
Net (loss) income $ (0.28) $ (0.46) $ 0.07 $ 0.03 $ (0.19)
============ ============ ============ ============ ============
------ ------ ------ ------ ------
Weighted average number of shares outstanding 12,414,816 12,630,964 12,742,122 12,238,421 6,579,577
============ ============ ============ ============ ============
20
Year ended December 31,
2003 2002 2001 2000 1999
(In thousands)
Balance Sheet Data (at end of period):
Working capital (deficit) $ 270 $ (2,210) $ 4,809 $ (1,003) $ (1,403)
Intangible assets, net $11,614 $ 14,389 $ 21,132 $ 22,024 $ 21,752
Total assets $90,602 $ 96,288 $ 104,670 $ 106,131 $ 98,115
Long-term debt, including current maturities $31,286 $ 33,312 $ 34,349 $ 36,685 $ 32,784
Stockholders' equity $54,212 $ 57,669 $ 63,856 $ 62,877 $ 56,568
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion reviews our operations for each of the three years in
the period ended December 31, 2003, and should be read in conjunction with our
Consolidated Financial Statements and related notes thereto included elsewhere
herein.
The following discussion includes Forward-Looking Statements. The accuracy of
such statements depends upon a variety of factors that may affect our business
and operations. Certain of these factors are discussed under Description of
Business -- Factors Influencing Future Results and Accuracy of Forward-Looking
Statements included in Item 1 of this report.
Summary of Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations
are based upon the Company's consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
the Company to make estimates and judgments that affect the reported amounts of
assets and liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities at the date of the Company's financial
statements. Actual results may differ from these estimates under different
assumptions or conditions.
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. The Company's
critical accounting policies are described below.
Revenue Recognition
Revenues from the Company's Car and Truck Wash Segment are recognized, net of
customer coupon discounts, when services are rendered or fuel or merchandise is
sold. The Company records a liability for gift certificates, ticket books, and
seasonal and annual passes sold at its car care locations but not yet redeemed.
The Company estimates these unredeemed amounts based on gift certificate and
ticket book sales and redemptions throughout the year as well as utilizing
historical sales and redemption rates per the car washes' point-of-sale systems.
Seasonal and annual passes are amortized on a straight-line basis over the time
during which the passes are valid.
Revenues from the Company's Security Products Segment are recognized when
shipments are made, or for export sales when title has passed. Shipping and
handling charges are included in revenues and cost of goods sold.
21
Costs of Terminated Acquisitions
Our policy is to charge as an expense any previously capitalized expenditures
relating to proposed acquisitions that in management's current opinion will not
be consummated.
Deferred Revenue
The Company records a liability for gift certificates, ticket books, and
seasonal and annual passes sold at its car care locations but not yet redeemed.
The Company estimates these unredeemed amounts based on gift certificates and
ticket book sales and redemptions throughout the year as well as utilizing
historical sales and tracking of redemption rates per the car washes' point- of-
sale systems. Seasonal and annual passes are amortized on a straight-line basis
over the time during which the passes are valid.
Impairment of Long-Lived Assets
In accordance with SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, we periodically review the carrying value of our long-lived
assets held and used, and assets to be disposed of, when events and
circumstances warrant such a review. We evaluate the carrying value of
long-lived assets for potential impairment on a reporting unit basis using
undiscounted after-tax estimated cash flows or on an individual asset basis if
the asset is held for sale. See Note 17 of the Notes to Consolidated Financial
Statements for information regarding impairment charges incurred with respect to
one full service car wash site in our Texas region and two car wash sites in our
Arizona region.
Goodwill
Prior to 2002, goodwill was amortized on a straight-line basis over 25 years.
On January 1, 2002, the Company adopted SFAS 142, Goodwill and Other Intangible
Assets, and as required, discontinued amortization of goodwill acquired prior to
July 1, 2001. Additionally, SFAS 142 required that, within six months of
adoption, the first phase of the goodwill transitional impairment testing be
completed at the reporting unit level as of the date of adoption. SFAS 142
requires that any goodwill impairment loss recognized as a result of initial
application be reported in the first interim period of adoption as a change in
accounting principle and that the income per share effects of the accounting
change be separately disclosed. The transitional impairment testing was
completed during the third quarter of 2002 and as of January 1, 2002 (See Note 3
of the Notes to Consolidated Financial Statements).
In accordance with SFAS 142, the Company also completed annual impairment tests
as of November 30, 2003, and 2002, and will be subject to an impairment test
each year thereafter and whenever there is an impairment indicator. Significant
estimates and assumptions are used in assessing the fair value of the reporting
units and determining impairment to goodwill (See Note 3 of the Notes to
Consolidated Financial Statements). The Company cannot guarantee that there will
not be impairments in subsequent years.
Other Intangible Assets
Other intangible assets consist primarily of deferred financing costs,
trademarks, and establishing a registered national brand name. Prior to 2002,
our trademarks and brand name were amortized on a straight line basis over 15
years. In accordance with SFAS 142, Goodwill and Other Intangible Assets, our
trademarks and brand name are considered to have indefinite lives, and as such,
are no longer subject to amortization. These assets will be tested for
impairment annually and whenever there is an impairment indicator. Deferred
financing costs are amortized on a straight-line basis over the terms of the
respective debt instruments. Customer lists and non-compete agreements are
amortized on a straight-line basis over their respective estimated useful lives.
Income Taxes
Deferred income taxes are determined based on the difference between the
financial accounting and tax bases of assets and liabilities. Deferred income
tax expense (benefit) represents the change during the period in the deferred
income tax assets and deferred income tax liabilities. Deferred tax assets
include tax loss and credit carryforwards and are reduced by a valuation
allowance if, based on available evidence, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
22
Introduction
Revenues
Car and Truck Wash Services
We own full service, exterior only and self-service car wash operations in New
Jersey, Pennsylvania, Delaware, Texas, Florida and Arizona, as well as truck
washes in Arizona, Indiana, Ohio and Texas. We earn revenues from washing and
detailing automobiles; performing oil and lubrication services, minor auto
repairs, and state inspections; selling fuel; and selling merchandise through
convenience stores within the car wash facilities. Revenues generated for 2003
for the Car and Truck Wash Segment were comprised of approximately 82% car wash
and detailing, 10% lube and other automotive services, and 8% fuel and
merchandise.
The majority of revenues are collected in the form of cash or credit card
receipts, thus minimizing customer accounts receivable.
Weather can have and has had a significant impact on volume at the individual
locations. We believe that the geographic diversity of our operating locations
mitigates the risk of adverse weather-related influence on our volume.
Security Products
During 2001, and for the first four months of 2002, the Company was paid $20,000
per month under a Management Agreement pursuant to which Mark Sport, an entity
controlled by Jon E. Goodrich, a director of the Company through December, 2003,
operated the Security Products Segment. Effective May 1, 2002, the Management
Agreement expired and the Company recommenced operation of the Security Products
Segment. Prior to the acquisition of the assets and operations of Micro-Tech,
the Company operated its Security Products Segment solely as the Consumer
Products Division. The Company's Consumer Products operations manufacture and
market personal safety, and home and auto security products which are sold
through retail stores, major discount stores, domestic and international
distributors, and at the Company's car care facilities.
With the acquisition on August 12, 2002 of certain of the assets and operations
of Micro-Tech, a manufacturer and retailer of electronic security and
surveillance devices, the Company added an additional division, the Electronic
Surveillance Products Division, to its Security Products Segment. The Company
has added security cameras, closed-circuit monitors, digital video recording
devices and related electronic security components to its line of well-known
personal security products. The Company is purchasing these items for resale
from OEM manufacturers.
Cost of Revenues
Car and Truck Wash Services
Cost of revenues consists primarily of direct labor and related taxes and
benefits, certain insurance costs, chemicals, wash and detailing supplies, rent,
real estate taxes, utilities, car damages, maintenance and repairs of equipment
and facilities, as well as the cost of the fuel and merchandise sold.
Security Products
During 2001, and for the first four months of 2002, the Security Products
Segment was operated under a Management Agreement by Mark Sport. Accordingly,
during that time, no costs were incurred by the Company. Cost of revenues within
the Security Products Segment consists primarily of costs to purchase or
manufacture the security products including direct labor and related taxes and
benefits, and raw material costs. Product return and warranty costs related to
the electronic security surveillance product business have been minimal in that
the majority of customer product warranty claims are reimbursed by the
manufacturer.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of management,
clerical and administrative salaries, professional services, insurance premiums,
sales commissions, and costs relating to marketing and sales.
We capitalize direct incremental costs associated with acquisitions. Indirect
acquisition costs, such as executive salaries, corporate overhead, public
relations, and other corporate services and overhead are expensed as incurred.
The Company also charges as an expense any capitalized expenditures relating to
proposed acquisitions that will not be consumated.
Depreciation and Amortization
Depreciation and amortization consists primarily of depreciation of buildings
and equipment, and amortization of certain intangible assets. Buildings and
equipment are depreciated over the estimated useful lives of the assets using
the straight-line method. Intangible assets, other than goodwill or intangible
assets with indefinite useful lives, are amortized over their useful lives
ranging from three to 15 years, using the straight-line method. In 2001,
goodwill was amortized using the straight-line method over 25 years. With the
adoption of SFAS 142 on January 1, 2002, we no longer amortize goodwill and
certain intangible assets, namely trademarks and service marks, determined to
have indefinite useful lives, thereby eliminating approximately $900,000 in
annual amortization expense.
Costs of Terminated Acquisitions
Our policy is to charge as an expense any previously capitalized expenditures
relating to proposed acquisitions that in our current opinion will not be
consummated. At December 31, 2003, there were no costs related directly to
proposed acquisitions that were not yet consummated. We periodically review the
future likelihood of these acquisitions and record appropriate provisions
against capitalized costs associated with projects that are not likely to be
completed.
Goodwill and Asset Impairment Charges
In accordance with SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, we periodically review the carrying value of our long-lived
assets held and used, and assets to be disposed of, for possible impairment when
events and circumstances warrant such a review. During the year ended December
31, 2002, we wrote down assets determined to be impaired by approximately $1.2
million. The asset write-down related to one of our full service car wash sites
in Texas and two full service car wash sites in Arizona. We have determined that
due to poor demographics and increased competition in the geographic areas of
these sites, their future expected cash flows will not be sufficient to recover
their respective carrying values. During the quarter ended June 30, 2003, we
further wrote down the assets related to one of the full service car wash sites
in Arizona which we partially wrote down at December 31, 2002, by an additional
$351,000. The additional write-down was the result of the impending loss of a
significant customer of this site resulting in an additional reduction of the
future expected cash flows of this site and the ability to recover the site's
carrying value. The Company closed the facility effective September 30, 2003. We
continue to market the remaining two sites for sale and have written down these
two assets to their estimated fair market values.
In the fourth quarter of 2003, as a result of the annual impairment test of
Goodwill and Other Intangibles in accordance with SFAS 142, we recorded an
impairment of approximately $3.4 million related to our Northeast region
reporting unit of our Car and Truck Wash Segment. This was principally due to a
reduction in future projected cash flows resulting from extended departures from
our historic revenue levels as a result of inclement weather and a slower
economy.
Other Income
Other income consists largely of rental income received from renting out excess
space at our car wash facilities, along with gains and losses on the sale of
property and equipment.
Income Taxes
Income tax (benefit) expense reflects the recording of income taxes on (loss)
income before cumulative effect of a change in accounting principle at effective
rates of approximately 1%, 36% and 37% for the years ended December 31, 2003,
2002, and 2001, respectively. In 2003, no income tax benefit was recorded for
the Northeast region reporting unit impairment of approximately $3.4 million due
to the non-deductibility of the related goodwill.
In 2002, the income tax benefit related to the cumulative effect of change in
accounting principle was recorded at an effective tax rate of 36% for the
impairments in the Arizona and Truck Wash reporting units. No income tax benefit
was recorded for the Northeast region reporting unit's impairment due to the
non-deductibility of the goodwill. The effective rate differs from the federal
statutory rate for each year primarily due to state and local income taxes,
non-deductible costs related to intangibles, fixed asset adjustments, and
changes to the valuation allowance.
24
Results of Operations for Each of the Three Years in the Period Ended December
31, 2003
The following table presents the percentage each item in the consolidated
statements of operations bears to total revenues:
Year ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
Revenues 100.0% 100.0% 100.0%
Cost of revenues 73.1 71.3 70.7
Selling, general and administrative expenses 19.4 18.0 15.3
Depreciation and amortization 4.0 4.2 5.8
Costs of terminated acquisitions - 0.1 0.3
Goodwill and asset impairment charges 7.7 2.5 -
------ ------ ------
Operating (loss) income (4.2) 3.9 7.9
Interest expense, net (4.0) (4.8) (6.0)
Other income 0.9 0.7 1.1
------ ------ ------
(Loss) income from continuing operations before income taxes (7.3) (0.2) 3.0
Income tax (benefit) expense (0.1) (0.1) 1.1
------ ------ ------
(Loss) income before cumulative effect of change in accounting principle (7.2) (0.1) 1.9
Cumulative effect of change in accounting principle, net of tax benefit - (12.3) -
------ ------ ------
Net (loss) income (7.2)% (12.4)% 1.9%
====== ======= ======
Revenues
Car and Truck Wash Services
Revenues for the year ended December 31, 2003 were $43.4 million as compared to
$44.1 million for the year ended December 31, 2002, a decrease of $0.7 million
or 1.6%. Of the $43.4 million of revenues for the year ended December 31, 2003,
$35.7 million or 82% was generated from car wash and detailing, $4.1 million or
10% from lube and other automotive services, and $3.6 million or 8% from fuel
and merchandise sales. Of the $44.1 million of revenues for the year ended
December 31, 2002, $36.7 million or 83% was generated from car wash and
detailing, $4.2 million or 10% from lube and other automotive services, and $3.2
million or 7% from fuel and merchandise sales. The decrease in wash and
detailing revenues was principally due to closing or divesting of three of our
car wash locations and a lube facility during 2003; the temporary closure of a
car wash location in Arizona due to fire damage; a departure from historic
revenue levels within the Northeast region due to several significant snow
storms in the first quarter of 2003, an increase in inclement weather,
particularly on weekends, within the Texas region and the impact of a slower
economy. Overall car wash volumes declined 6.9% in 2003 from 2002, including
1.8% from the closing or divesting of the three car wash locations noted above.
Partially offsetting this decline in volume, the Company experienced an increase
in average wash and detailing revenue per car to $14.52 in 2003, from $13.89 in
2002. This increase in average wash and detailing revenue per car was the result
of management's continued focus on aggressively selling detailing and additional
on-line car wash services. The increase in fuel and merchandise revenues is the
result of more aggressive pricing on fuel to attract traffic into our car wash
facilities and the addition of higher quality merchandise in our car wash
lobbies.
Revenues for the year ended December 31, 2002 were $44.1 million as compared to
$48.0 million for the year ended December 31, 2001, a decrease of $3.9 million
or 8.1%. Of the $44.1 million of revenues for the year ended December 31, 2002,
$36.7 million or 83% was generated from car wash and detailing, $4.2 million or
10% from lube and other automotive services, and $3.2 million or 7% from fuel
and merchandise sales. Of the $48.0 million of revenues for the year ended
December 31, 2001, $39.9 million or 83% was generated from car wash and
detailing, $4.5 million or 9% from lube and other automotive services, and $3.6
million or 8% from fuel and merchandise sales. The decrease in wash and
detailing revenues was principally due to the divesting of two of our car wash
locations during 2001 combined with a departure from our historic revenue levels
within our Northeast region due to the unusual lack of snow and pollen in the
first six months of 2002 and increased rainfall in the quarter ending December
31, 2002. The Company also experienced more challenging weather within its Texas
region for the quarters ended September 30 and December 31, 2002. Car wash
volume declined 8.4% in 2002 from 2001. In addition to these declines in volume,
the Company experienced a slight reduction in average wash and detailing
revenues per car to $13.89 in 2002, from $13.90 per car in 2001. Despite
management's continued focus on aggressively selling detailing and additional
on-line car wash services, more aggressive coupon and discount promotions to
encourage volume reduced the average revenue per car. As to the decline in
revenues from lube and other automotive services, we discontinued the practice
of providing a free wash to lube customers, resulting in decreased lube revenues
but benefitting our overall site gross margin performance. The decline in fuel
and merchandise revenues was the result of instituting certain minimum gross
margin criteria which reduced fuel sales and the sale of certain low margin
merchandise.
25
Security Products
Pursuant to a Management Agreement, we earned $80,000 in 2002 and $240,000 in
2001. These amounts are included under revenues from operating agreements.
Effective May 1, 2002, the Company recommenced operation of the Security
Products Segment. Revenues for the Consumer Products Division were approximately
$2.8 million and $2.1 million in 2003 and 2002, respectively. Additionally, in
August 2002, the Company purchased the inventory and certain assets and
operations of Micro-Tech, an electronic surveillance and security device
business. Revenues for this business unit were approximately $2.8 million and
$380,000 in 2003 and 2002, respectively.
Cost of Revenues
Car and Truck Wash Services
Cost of revenues for the year ended December 31, 2003 were $32.3 million or 74%
of revenues with car washing and detailing costs at 73% of respective revenues,
lube and other automotive services costs at 77% of respective revenues, and fuel
and merchandise costs at 87% of respective revenues. Cost of revenues for the
year ended December 31, 2002 were $31.8 million, or 72% of revenues with car
wash and detailing costs at 70% of respective revenues, lube and other
automotive services costs at 78% of respective revenues, and fuel and
merchandise costs at 87% of respective revenues.
In 2003, the Company experienced a deterioration in wash and detailing operating
margins largely due to the decrease in wash volume of 6.9% as compared to the
prior year, combined with increased insurance premiums and related claim costs,
lease termination costs related to an underperforming car wash property closed
in 2003, and an increase in labor costs as a percent of revenues of
approximately two percentage points. This deterioration in wash and detailing
operating margins was partially offset by certain temporary and permanent cost
savings measures instituted in March of 2003, including reductions in payroll
and related benefit costs, repairs and maintenance costs and certain other
operating expenses.
Cost of revenues for the year ended December 31, 2002 were $31.8 million or 72%
of revenues with car washing and detailing costs at 70% of respective revenues,
lube and other automotive services costs at 78% of respective revenues, and fuel
and merchandise costs at 87% of respective revenues. Cost of revenues for the
year ended December 31, 2001 were $34.1 million, or 71% of revenues with car
wash and detailing costs at 69% of respective revenues, lube and other
automotive services costs at 77% of respective revenues, and fuel and
merchandise costs at 89% of respective revenues.
With only a slight decrease in average wash and detailing revenues per car in
2002 and our continued emphasis on controlling direct labor and other operating
costs such as wash and detailing chemicals and supplies, car damages, uniform
expense, and repairs and maintenance costs, we experienced only a one percentage
point reduction in wash and detailing gross margins in 2002 despite the 8.4%
volume decline previously noted. We also experienced a slight increase in our
direct wash and detailing labor costs as a percent of car wash and detail
revenues to 48% in 2002 as compared to 47% in 2001 as a result of the volume
decline.
Security Products
During 2001 and for the first four months of 2002, pursuant to a Management
Agreement, no costs were incurred by us. Cost of revenues were $3.5 million or
62% of revenues and $1.5 million or 61% of revenues for 2003 and 2002,
respectively.
26
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended December 31,
2003 were $9.5 million compared to $8.4 million for the same period in 2002, an
increase of approximately $1.1 million or 13%. SG&A costs as a percent of
revenues were 19.4% for 2003 as compared to 18.1% in 2002. The increase in SG&A
costs is primarily the result of recommencing operation of the Security Products
Segment in May 2002, which along with the growth in the Electronic Surveillance
Products Division added a combined $1.2 million of SG&A costs in 2003. The
Company also incurred approximately $168,000 of legal fees through December 31,
2003 related to the investigation being conducted by the United States
Securities and Exchange Commission. These increases in costs were partially
offset by certain temporary and permanent cost saving measures initiated in
March of 2003, including reductions in payroll and related benefit costs.
Selling, general and administrative expenses for the year ended December 31,
2002 were $8.4 million compared to $7.4 million for the same period in 2001, an
increase of approximately $1.0 million or 14%. SG&A costs as a percent of
revenues were 18.0% for 2002 as compared to 15.3% in 2001. The increase in SG&A
costs was primarily the result of recommencing operation of the Security
Products Segment in May 2002, which, along with the acquisition of the assets
and operations of Micro-Tech, added a combined $0.9 million of SG&A costs in
2002. We also experienced an increase in certain credit card and bank charges
and a significant increase in insurance costs. These increases were partially
offset by a decrease in administrative salaries and certain office costs.
Depreciation and Amortization
Depreciation and amortization totaled $2.0 million for the year ended December
31, 2003 and December 31, 2002.
Depreciation and amortization totaled $2.0 million for the year ended December
31, 2002 as compared to $2.8 million for 2001. This decrease was primarily
attributable to the adoption of SFAS 142 on January 1, 2002, under which the
Company no longer amortizes goodwill and other intangible assets determined to
have indefinite useful lives. This decrease of approximately $900,000 in
amortization costs was partially offset by increased depreciation expense as a
result of recent property and equipment purchases and recommencing operation of
the Security Products Segment in May 2002.
Costs of Terminated Acquisitions
Our policy is to charge as an expense any previously capitalized expenditures
relating to proposed acquisitions that in our current opinion will not be
consummated. During 2002 and 2001, the costs of previously capitalized
expenditures related to proposed acquisitions totaled approximately $57,000 and
$135,000, respectively. These costs, which principally related to several
possible acquisitions we pursued outside the car wash industry, are primarily
related to due diligence costs.
Asset Impairment Charges
In accordance with SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, we periodically review the carrying value of our long-lived
assets held, and used and assets to be disposed of, for possible impairment when
events and circumstances warrant such a review. During the year ended December
31, 2002, we wrote down assets determined to be impaired by approximately $1.2
million. The asset write-down related to one of our full service car wash sites
in Texas and two full service car wash sites in Arizona. We have determined that
due to poor demographics and increased competition in the geographic areas of
these sites, their future expected cash flows will not be sufficient to recover
their respective carrying values. During the quarter ended June 30, 2003, we
further wrote down the assets related to one of the full service car wash sites
in Arizona which we partially wrote down at December 31, 2002, by an additional
$351,000. The additional write-down was the result of the impending loss of a
significant customer of this site resulting in an additional reduction of the
future expected cash flows of this site and the ability to recover the site's
carrying value. The Company closed the facility effective September 30, 2003. We
continue to market the remaining two sites for sale and have written down these
two assets to their estimated fair market values.
In the fourth quarter of 2003, as a result of the annual impairment test of
Goodwill and Other Intangibles in accordance with SFAS 142, we recorded an
impairment of approximately $3.4 million related to our Northeast region
reporting unit of our Car and Truck Wash Segment. This was principally due to a
reduction in future projected cash flows resulting from extended departures from
our historic revenue levels as a result of inclement weather and a slower
economy.
27
Interest Expense, Net
Interest expense, net of interest income, for the year ended December 31, 2003,
was $2.0 million compared to $2.2 million for 2002. This decrease in our
interest expense was the result of a decrease in interest rates on approximately
50% of our long-term debt which has interest rates tied to the prime rate and a
reduction in our outstanding debt as a result of normal principal payments.
Interest expense, net of interest income, for the year ended December 31, 2002,
was $2.2 million compared to $2.9 million for 2001. This decrease in our
interest expense was the result of a decrease in interest rates on approximately
50% of our long-term debt which has interest rates tied to the prime rate and a
reduction in our outstanding debt as a result of normal principal payments.
Other Income
Other income for 2003 was $438,000 compared to $327,000 for 2002. Included in
2003 is a $107,000 gain on the sale of a car wash facility in our Northeast
region.
Other income for 2002 was $327,000 compared to $514,000 for 2001. The primary
reason for the decrease was that the 2001 figure included a $216,000 gain on the
sale of a car wash facility in August of 2001.
Income Taxes
We recorded income tax (benefit) expense of $(50,000), $(32,000), and $534,000
for the years ended December 31, 2003, 2002, and 2001, respectively. Income tax
(benefit) expense reflects the recording of income taxes on (loss) income before
cumulative effect of change in accounting principle at effective rates of
approximately 1%, 36%, and 37% for the years ended December 31, 2003, 2002, and
2001, respectively. In 2003, no income tax benefit was recorded on the Northeast
region reporting unit goodwill impairment of approximately $3.4 million due to
the non-deductibility of the goodwill. The effective rate differs from the
federal statutory rate for each year primarily due to state and local income
taxes, non-deductible costs related to intangibles, fixed asset adjustments and
changes to the valuation allowance.
In 2002, we recorded an income tax benefit related to the cumulative effect of a
change in accounting principle of approximately $2.2 million which reflects an
effective rate of 36% for the impairment in the Arizona and truck wash reporting
units. No income tax benefit was recorded for the Northeast region reporting
unit goodwill impairment due to the non-deductibility of the goodwill.
At December 31, 2003, we had approximately $21.0 million of net operating loss
carryforwards for federal income tax purposes. Components of the net operating
loss carryforwards include $19.8 million from continuing operations and $1.2
million from acquired net operating losses attributable to the acquisition of
Colonial Full Service Car Wash, Inc.
Liquidity and Capital Resources
Liquidity
Cash and cash equivalents were $3.4 million at December 31, 2003. The ratio of
our total debt to total capitalization, which consists of total debt plus
stockholders' equity, was 37% at December 31, 2003, 37% at December 31, 2002,
and 35% at December 31, 2001.
Our business requires a substantial amount of capital, most notably to pursue
our expansion strategies, including our current expansion in the electronic
surveillance products business, and for equipment purchases and upgrades for our
Car and Truck Wash Segment. We plan to meet these capital needs from various
financing sources, including borrowings, internally generated funds, and the
issuance of common stock if the market price of the Company's stock improves.
As of December 31, 2003, we had working capital of approximately $270,000. At
December 31, 2002, working capital was a negative $2.2 million, including cash
and cash equivalents of $6.2 million. The change in working capital at December
31, 2003 is primarily attributable to renewal and reclassification to
non-current liabilities of approximately $6.4 million of 15-year amortizing
loans with our current lender. This was partially offset by reclassification to
current liabilities of approximately $3.2 million of additional loans due and up
for renewal in June through October, 2004. The Company intends to renew these
loans with the current lender. Although the Company has been successful in
renewing similar loans with the current lender in the past, including the
renewal of the above mentioned loans in 2003 totaling $6.4 million for a five
year renewal period, there can be no assurance that our lender will continue to
provide us with renewals or with renewals at favorable terms.
28
We estimate aggregate capital expenditures for our Car and Truck Wash Segment,
exclusive of acquisitions of businesses, of approximately $500,000 for the year
ending December 31, 2004. In October 2002, we purchased a building as a
warehouse, production and administrative facility for our new electronic
surveillance products operations. In October 2003, we purchased additional
warehouse and office space adjacent to the original facility. We financed a
portion of the $885,000 total purchase price of our facility with a long-term
mortgage of approximately $728,000. Additionally, we have spent approximately
$4.2 million to date in developing our Electronic Surveillance Products
Division, including the acquisition costs of Micro-Tech and Vernex and the cost
of developing and purchasing inventory for our expanded product line. We will
continue to expend significant cash for the purchasing of inventory as we
introduce new electronic surveillance products in the future.
Debt Capitalization and Other Financing Arrangements
At December 31, 2003, we had borrowings of approximately $31.3 million. We had
three letters of credit outstanding at December 31, 2003, totaling $825,000 as
collateral relating to workers' compensation insurance policies. We maintain a
revolving credit facility to provide financing for additional electronic
surveillance product inventory purchases.
During 2000 and 2001, we refinanced on a long term basis under favorable terms
the majority of our short term debt related to our 1999 and 2000 acquisitions.
Several of our debt agreements, as amended, contain certain affirmative and
negative covenants and require the maintenance of certain levels of tangible net
worth and the maintenance of certain debt coverage ratios on a consolidated
level. At December 31, 2003, we were not in compliance with our consolidated
debt coverage ratio related to our GMAC notes payable. With respect to the GMAC
notes payable, the Company has received a waiver of acceleration of the notes
through January 1, 2005. Additionally, the Company has entered into amendments
to the Bank One term loan agreements as of December 31, 2003. The Company is
currently in compliance with these covenants as amended. The Company initiated
certain temporary and permanent cost savings measures in March of 2003,
including reductions in payroll expense and certain operating costs to enable it
to maintain compliance with the Bank One consolidated debt coverage ratio. These
savings through December 31, 2003 totaled approximately $425,000. Additional
temporary and permanent cost saving measures were intiated in March of 2004,
including further reductions in payroll expenses and certain operating costs,
along with an increase in prices within the Car and Truck Wash Segment to enable
the Company to maintain compliance with the Bank One consolidated debt coverage
ratio. The amended debt coverage ratio with Bank One requires the Company to
maintain a consolidated earnings before interest, taxes, depreciation and
amortization ("EBITDA") to debt service ( collectively " the debt coverage
ratio") of 1.1 to 1 at December 31, 2003 and in the future. As of March 11,
2004, the preliminary operating results for the quarter ended March 31, 2004
indicate that we should meet the Bank One required debt coverage ratio as of
March 31, 2004; however, we cannot provide assurance that favorable operating
trends will continue through March 31, 2004. If we default on any of the Bank
One covenants or the GMAC covenant in the future, the Company will need to
obtain further amendments or waivers from these lenders. If the Company is
unable to obtain waivers or amendments in the future, Bank One debt totaling
$14.9 million and GMAC debt totaling $11.6 million recorded as long-term debt at
December 31, 2003 would become due on demand.
The Company's ongoing ability to comply with its debt covenants under its credit
arrangements and refinance its debt depends largely on the achievement of
adequate levels of cash flow. Our cash flow has been and could continue to be
adversely affected by weather patterns and economic conditions. In the event
that non-compliance with the debt covenants should reoccur, the Company would
pursue various alternatives to successfully resolve the non-compliance, which
might include, among other things, seeking additional debt covenant waivers or
amendments, or refinancing debt with other financial institutions. Although the
Company believes that it would be successful in resolving potential
non-compliance with its debt covenants, or refinancing its current debt, there
can be no assurance that further debt covenant waivers or amendments would be
obtained or that the debt would be refinanced with other financial institutions
on favorable terms. If we are unable to obtain renewals of our loans or
refinancings on favorable terms, our ability to operate would be materially and
adversely affected.
The Company is obligated under various operating leases, primarily for certain
equipment and real estate within the Car and Truck Wash Segment. Certain of
these leases contain purchase options, renewal provisions, and contingent
rentals for a proportionate share of taxes, utilities, insurance, and annual
cost of living increases. Future minimum lease payments under operating leases
with initial or remaining noncancellable lease terms in excess of one year as of
December 31, 2003 are as follows: 2004 - $1.3 million; 2005 - $1.0 million; 2006
- $616,000; 2007 - $501,000; 2008 - $369,000; and thereafter - $1.1 million.
29
The following are summaries of our contractual obligations and other commercial
commitments at December 31, 2003 (in thousands):
Payments Due By Period
---------------------------------------------------------------------------------
Contractual Obligations Total 2004 2005 - 2006 2007 - 2008 Thereafter
----------------------- ------------- ------------- ------------- ------------- ------------
Long-term debt, including capital $ 31,286 $ 5,520 $ 4,935 $ 11,273 $ 9,558
leases
Minimum operating lease payments 4,853 1,280 1,582 870 1,121
------------- ------------- ------------- ------------- ------------
$ 36,139 $ 6,800 $ 6,517 $ 12,143 $ 10,679
============= ============= ============ ============ ============
Amounts Expiring Per Period
Other Commercial Commitments Total 2004 2005 - 2006 2007 - 2008 Thereafter
----------------------- ------------- ------------- ------------- ------------- ------------
Line of Credit $ 500 $ 500 (1) $ - $ - $ -
Standby Letters of Credit 825 825 - - -
------------- ------------- ------------- ------------- ------------
$ 1,325 $ 1,325 $ - $ - $ -
============= ============= ============= ============= =============
(1) There were no borrowings outstanding under the Company's line of credit at
December 31, 2002 or 2003.
On April 5, 2000, we executed a master facility agreement with Fusion Capital
Fund II, LLC ("Fusion") pursuant to which Fusion agreed to enter into up to two
equity purchase agreements, each with an aggregate principal amount of $12
million. The master facility agreement expired on February 20, 2003. The first
equity purchase agreement was executed by Fusion on April 17, 2000. Proceeds
from purchased shares through December 31, 2001 totaled approximately $1.3
million. There were no purchased shares in 2002 or 2003.
Cash Flows
Operating Activities. Net cash provided by operating activities totaled $137,000
for the year ended December 31, 2003. Cash provided by operating activities in
2003 was impacted by working capital used for the expansion of the new
Electronic Surveillance Products Division and the effect of increased inclement
weather, especially in the Northeast and Texas regions, along with the impact of
a slower economy.
Investing Activities. Cash used in investing activities totaled $569,000 for the
year ended December 31, 2003. The use of cash in 2003 reflects $1.1 million for
capital expenditures, including $873,000 relating to ongoing car care operations
and $234,000 for the expansion of the new Electronic Surveillance Products
Division. These expenditures were offset partially by $598,000 of cash proceeds
from the sale of a car wash facility in our Northeast region.
Financing Activities. Cash used in financing activities was $2.3 million for the
year ended December 31, 2003. This reflects routine principal payments on debt
of $2.4 million, proceeds from the issuance of stock under the Company's stock
option plans of $40,000, and $14,000 for the purchase and retirement of shares
of our common stock.
Seasonality and Inflation
The Company believes that its car washing and detailing operations are adversely
affected by extended periods of inclement weather. In particular, long periods
of rain and cloudy weather adversely affect our car wash volumes and related
lube and other automotive services as people typically do not wash their cars
during such periods. Additionally, extended periods of warm, dry weather may
encourage customers to wash their cars themselves which also can adversely
affect our car wash business. The Company has mitigated the risk of unfavorable
weather patterns by having operations in diverse regions.
30
The Company believes that inflation and changing prices have not had, and are
not expected to have, any material adverse effect on its results of operations
in the near future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are not materially exposed to market risks arising from fluctuations in
foreign currency exchange rates, commodity prices, or equity prices.
Interest Rate Exposure
A significant portion of our debt is at fixed rates, and as such, changes in
market interest rates would not significantly impact operating results unless
and until such debt would need to be refinanced at maturity. Substantially all
of our variable rate debt obligations are tied to the prime rate, as is our
incremental borrowing rate. Therefore, a one percent increase in the prime rate
would not have a material effect on the fair value of our variable rate debt at
December 31, 2003.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The reports of independent certified public accountants and Consolidated
Financial Statements are included in Part III, ITEM 15 of this Report beginning
on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
In January 2000, we selected the international accounting firm of Grant Thornton
LLP to serve as our new independent accountants for the audit of the Company's
Consolidated Financial Statements for the year ended December 31, 1999. The
appointment of Grant Thornton LLP as continuing auditors for the years ended
December 31, 2001, 2002 and 2003 were approved by our Board of Directors and
ratified by our Stockholders at the Company's Annual Meetings.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's management conducted an evaluation, under the supervision and with
the participation of the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of December 31, 2003. Based on this
evaluation and as of the date of the evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in alerting them in a timely manner to material
information required to be included in the Company's periodic filings with The
Securities and Exchange Commission. In addition, management, including the Chief
Executive Officer and Chief Financial Officer, reviewed the Company's internal
controls, and there have been no significant changes in the Company's internal
controls or in other factors that could significantly affect those controls
subsequent to the date of their last evaluation.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position
Louis D. Paolino, Jr........................ 47 Chairman of the Board, President, and Chief Executive
Officer
Robert M. Kramer............................ 51 Chief Operating Officer, Executive Vice President, General
Counsel and Secretary
Gregory M. Krzemien......................... 44 Chief Financial Officer and Treasurer
Ronald R. Pirollo........................... 45 Chief Accounting Officer and Corporate Controller
Matthew J. Paolino.......................... 39 Director, Vice President
Mark S. Alsentzer........................... 48 Director
Constantine N. Papadakis, Ph.D. . . . . . . . . 58 Director
Burton Segal. . . . . . . . . . . . . . . . . . 60 Director
31
All of the Mace's directors serve for terms of one year each until their
successors are elected and qualified.
Louis D. Paolino, Jr. has served as the Chairman of the Board, President and
Chief Executive Officer of the Company since May 1999. From June 1996 through
December 1998, Mr. Paolino served as Chairman of the Board, President and Chief
Executive Officer of Eastern Environmental Services, Inc. Prior thereto, he was
President of Soil Remediation of Philadelphia, Inc., a company engaged in the
business of treating contaminated soil. From September 1993 to June 1996, Mr.
Paolino served as a Vice President of USA Waste Services, Inc. From November
1995 to January 1996, Mr. Paolino served on the Board of Directors of Metal
Management, Inc., formerly known as General Parametrics Corp., a publicly traded
company. Mr. Paolino received a B.S. in Civil Engineering from Drexel
University. Mr. Paolino is 47 years old.
Robert M. Kramer has served as Executive Vice President, General Counsel, and
Secretary of the Company since May 1999, and as Chief Operating Officer since
July 2000. Mr. Kramer also served as a director of the Company from May 1999 to
December 2003. From June 1996 through December 1998, he served as General
Counsel, Executive Vice President and Secretary of Eastern Environmental
Services, Inc. Mr. Kramer is an attorney and has practiced law since 1979 with
various firms, including Blank Rome Comisky & McCauley, Philadelphia,
Pennsylvania and Arent Fox Kitner Poltkin & Kahn, Washington, D.C. From 1989 to
December 2000, Mr. Kramer had been the sole partner of Robert M. Kramer &
Associates, P.C., a law firm which consisted of three lawyers. From December
1989 to December 1997, Mr. Kramer served on the Board of Directors of American
Capital Corporation, a registered securities broker dealer. Mr. Kramer received
B.S. and J.D. degrees from Temple University Law School. Mr. Kramer is 51 years
old.
Gregory M. Krzemien has served as the Chief Financial Officer and Treasurer of
the Company since May 1999. From August 1992 through December 1998, he served as
Chief Financial Officer and Treasurer of Eastern Environmental Services, Inc.
From October 1988 to August 1992, Mr. Krzemien was a senior audit manager with
Ernst & Young LLP. Mr. Krzemien received a B.S. degree in Accounting from the
Pennsylvania State University and is a certified public accountant. Mr. Krzemien
is 44 years old.
Ronald R. Pirollo has served as Chief Accounting Officer and Corporate
Controller of the Company since May 1999. Mr. Pirollo served as Vice President
and Corporate Controller of Eastern Environmental Services, Inc. from July 1997
to June 1999. Prior thereto, Mr. Pirollo was with Envirite Corporation for ten
years, where he served in various financial management positions including Vice
President - Finance. Mr. Pirollo received a B.S. degree in Accounting and an MBA
from Villanova University. Mr. Pirollo is 45 years old.
Matthew J. Paolino has served as a director and as a Vice President of the
Company since May 1999. From 1996 to December 1998, Mr. Paolino served as a
director of Eastern Environmental Services, Inc. as well as Vice President of
Risk Management, Asset Management and Special Waste Divisions of Eastern
Environmental Services, Inc. From 1993 to 1996, Mr. Paolino served as Vice
President and General Manager - Soil Remediation Division of USA Waste Services,
Inc., which was acquired by Eastern in August 1997. Mr. Paolino received a B.S.
degree in Civil Engineering from Villanova University in 1986 and a J.D. degree
from the Widener School of Law in 1994. Mr. Paolino is the brother of Louis D.
Paolino, Jr., the Chairman, President and Chief Executive Officer of the
Company. Mr. Paolino is 39 years old.
Mark S. Alsentzer has served as a director of the Company since December 1999.
From December 1996 through the present, Mr. Alsentzer has been President and
Chief Executive Officer of U.S. Plastic Lumber Corporation (a plastic and lumber
and recycling company). From 1992 to December 1996, Mr. Alsentzer served as Vice
President of Republic Environmental Systems, Inc. (an environmental services
company). Mr. Alsentzer also serves as a director, and since January 4, 2000, as
Chairman of the Board, of U.S. Plastic Lumber Corporation. Mr. Alsentzer is 48
years old.
Constantine N. Papadakis, Ph.D. has served as a director of the Company since
May 1999. From 1995 through the present, Dr. Papadakis has been President of
Drexel University. From 1986 through 1995, Dr. Papadakis was Dean of the College
of Engineering, Geier Professor of Engineering Education and Professor of Civil
Engineering at the University of Cincinnati. Dr. Papadakis also serves on the
board of directors of the Philadelphia Stock Exchange. Dr. Papadakis is 58 years
old.
Burton Segal has served as a director of the Company since December 2003. From
1973 through the present, Mr. Segal has been a Principal in the Accounting firm
of Burton Segal & Co., Certified Public Accountants.
32
Audit Committee Financial Expert
The Board of Directors has determined that Burton Segal, the Chairman of the
Company's Audit Committee, is an audit committee financial expert as defined by
Item 401(h) of Regulation S-K of the Exchange Act.
Audit Committee
The Company has a separately designated standing Audit Committee established in
accordance with Section 3(a)(58)(A) of the Exchange Act. The members of the
Audit Committee are Burton Segal, Chairman, Mark S. Alsentzer and Constantine N.
Papadakis, Ph.D. The Board of Directors has determined that each member of the
Audit Committee is independent within the meaning of Rule 4200(a)(15) of the
National Association of Securities Dealers' listing standards.
Code of Ethics and Corporate Governance
The Company has adopted a Code of Ethics and Business Conduct for directors,
officers (including the chief executive officer, chief financial officer, and
chief accounting officer) and employees. The Code of Ethics and Business Conduct
is posted on our website at www.mace.com.
The Board of Directors adopted Corporate Governance Guidelines. Stockholders are
encouraged to review the Corporate Governance Guidelines at our website
www.mace.com for information concerning the Company's governance practices.
Copies of the charters of the committees of the Board are also available on the
Company's website.
Section 16(a) Beneficial Ownership Reporting Compliance.
Section 16(a) of the Exchange Act requires Mace's directors and executive
officers, as well as persons beneficially owning more than 10% of Mace's
outstanding shares of common stock and certain other holders of such shares
(collectively, "Covered Persons"), to file with the Commission and the NASDAQ
Stock Market (the "NASDAQ"), within specified time periods, initial reports of
ownership, and subsequent reports of changes in ownership, of common stock and
other equity securities of Mace. Based upon Mace's review of copies of such
reports furnished to it and upon representations of Covered Persons that no
other reports were required, to Mace's knowledge, all of the Section 16(a)
filings required to be made by the Covered Persons with respect to 2003 were
made on a timely basis.
ITEM 11. EXECUTIVE COMPENSATION
The following table provides summary information concerning cash and certain
other compensation paid or accrued by Mace to or on behalf of Mace's Chief
Executive Officer and each of the other most highly compensated executive
officers of Mace whose compensation exceeded $100,000 (the "Named Executive
Officers") for the three years ended December 31, 2003.
33
SUMMARY COMPENSATION TABLE(1)
------------------------------------------------------------------------------
Long-Term
Compensation
Fiscal Year Awards
NAME AND ended Annual Compensation Securities
PRINCIPAL POSITIONS December 31, Salary Bonus Underlying
Options (#)
------------------------------------------------------------------------------------------
Louis D. Paolino, Jr.
President, Chief Executive 2003 $315,077 - 150,000
Officer and Chairman of the 2002 $320,000 - 87,500
Board 2001 $320,000 - -
------------------------------------------------------------------------------------------
Robert M. Kramer
Executive Vice President,
Chief Operating Officer, 2003 $155,692 - 150,000
General Counsel and 2002 $151,202 - 37,500
Secretary 2001 $137,500 - 50,000
------------------------------------------------------------------------------------------
Gregory M. Krzemien 2003 $135,492 - 150,000
Chief Financial Officer and 2002 $131,596 - 37,500
Treasurer 2001 $121,000 - 50,000
------------------------------------------------------------------------------------------
Ronald R. Pirollo
Chief Accounting
Officer 2003 $118,427 - 100,000
and Corporate 2002 $117,615 - 15,000
Controller 2001 $112,500 - 30,000
------------------------------------------------------------------------------------------
(1) The columns captioned "Annual Compensation - Other Annual Compensation,"
"Long-Term Compensation - Restricted Stock Awards," "LTIP Payouts," and
"All Other Compensation" have been omitted because, in the first case, none
of the Named Executive Officers received other annual compensation
exceeding either $50,000 or 10% of such officer's total annual salary and
bonus and, in the other cases, because the Company (i) made no restricted
stock awards, (ii) maintained no long-term incentive plan, and (iii) paid
no other compensation to the Named Executive Officers, in each case during
the three fiscal years ended December 31, 2003. Additionally, the Company
has not issued any stock appreciation rights (SARs) in any of the past
three years.
Director Compensation
Mace does not pay fees to directors, but pays non-employee directors reasonable
travel and out-of-pocket expenses relating to their attendance at meetings.
On October 18, 2000, Mace granted options to purchase 10,000 shares of Mace
common stock at $2.563 per share to each of Mace's outside directors, Richard B.
Muir, Mark S. Alsentzer and Constantine N. Papadakis, Ph.D., for their service
on the Board of Directors during 2000. Additionally, on October 18, 2000, Mace
granted options to purchase 5,000 shares of Mace common stock at $2.563 per
share to each of Mace's directors, Louis D. Paolino, Jr., Robert M. Kramer,
Matthew J. Paolino, Jon E. Goodrich, Richard B. Muir, Mark S. Alsentzer and
Constantine N. Papadakis, Ph.D., for agreeing to serve on the Board of Directors
for 2001. Additionally, on April 4, 2002, Mace's outside directors, Richard B.
Muir, Mark S. Alsentzer and Constantine N. Papadakis, Ph.D., were each granted
options to purchase 12,500 shares of Mace common stock at $2.36 per share for
their service on the Board of Directors in 2002.
Equity Compensation Plan Information
Stock options are issued periodically to employees at an exercise price of no
less than the then current market price of the Common Stock and generally expire
ten years from the date of grant. Allocation of available options and vesting
schedules are at the discretion of the Compensation Committee and are determined
by potential contribution to, or impact upon, the overall performance of the
Company by the executives and employees. Stock options are also issued
periodically to members of the Board of Directors. These options may have
similar terms as those issued to officers or may vest immediately. The purpose
of the Stock Option Plan, which has been approved by the stockholders of the
Company, is to provide a means of performance-based compensation in order to
provide incentive for the Company's employees. Warrants have been issued in
connection with the purchase of certain businesses and to a director. The terms
of the warrants have been established by the Board of Directors of the Company.
Certain of the warrants have been approved by stockholders.
The following table sets forth certain information regarding the Company's Stock
Option Plan and warrants as of December 31, 2003.
34
(c)
Number of securities
(a) (b) remaining available
Number of securities Weighted average for future issuance
to be issued upon exercise price under equity
exercise of of outstanding compensation plans
Plan Category outstanding options, (excluding securities
options, warrants warrants and reflected in column
and rights rights (a))
-----------------------------------------------------------------------------------------
Equity compensation plans
approved by stockholders 2,590,015 $3.92 5,586,237
-----------------------------------------------------------------------------------------
Equity compensation plans
not approved by
stockholders 274,550 $9.11 N/A
-----------------------------------------------------------------------------------------
Option and Warrant Grants in Last Fiscal Year
The following table sets forth certain information concerning individual grants
of stock options to the Named Executive Officers during the fiscal year ended
December 31, 2003.
OPTION GRANTS IN LAST FISCAL YEAR (1)
(Individual Grants)
% of Total Potential
Number of Options Realizable
Securities Granted to Value at
Underlying Employees Exercise Assumed Rates
Options in Fiscal Price Expiration of Stock
Name Granted (2) Year (1) Per Date Price
Share Appreciation
for
Option Term
5% 10%
-------------------------------------------------------------------------------------------------
Louis D. Paolino, Jr. 150,000 19.0% $1.32 7/14/13 $124,521 $315,000
-------------------------------------------------------------------------------------------------
Gregory M. Krzemien 150,000 19.0% $1.32 7/14/13 $124,521 $315,000
-------------------------------------------------------------------------------------------------
Robert M. Kramer 150,000 19.0% $1.32 7/14/13 $124,521 $315,000
-------------------------------------------------------------------------------------------------
Ronald R. Pirollo 100,000 12.6% $1.69 11/14/13 $106,000 $269,000
-------------------------------------------------------------------------------------------------
(1) The Company granted options and warrants to employees to purchase a total
of 791,000 shares of common stock during the fiscal year ended December 31,
2003. All of these grants were made at fair market value.
(2) Options vest at the rate of 1/3 at date of grant, 1/3 on the six-month
anniversary date from date of grant, and 1/3 on the one-year anniversary
date from the date of the grant.
Aggregated Option and Warrant Exercises in Last Fiscal Year
The following table sets forth certain information regarding stock options held
by the Named Executive Officers during the fiscal year ended December 31, 2003,
including the number and value of exercisable and unexercisable stock options as
of December 31, 2003. No options were exercised by any of the Named Executive
Officers during the fiscal year ended December 31, 2003. In-the-money options
are those for which the fair market value of the underlying securities exceeds
the exercise price of the option. The closing transaction price of the Company's
common stock on December 31, 2003 was $2.09 per share.
35
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
Number of Securities
Underlying Value of Unexercised
Unexercised Options In-the-money
at Fiscal Year End 2003 Options/SARs at Year End 2003
-------------------------------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
-------------------------------------------------------------------------------------------
Louis D. Paolino,
Jr. 113,334 129,166 $38,500 $77,000
-------------------------------------------------------------------------------------------
Gregory M. Krzemien 187,500 112,500 $74,250 $77,000
-------------------------------------------------------------------------------------------
Robert M. Kramer 230,000 112,500 $74,250 $77,000
-------------------------------------------------------------------------------------------
Ronald R. Pirollo 103,334 71,666 $34,784 $26,666
-------------------------------------------------------------------------------------------
Employment Agreements
Louis D. Paolino, Jr., Employment Agreement
Mace currently employs Louis D. Paolino, Jr., as its President and Chief
Executive Officer under a three-year employment agreement dated August 12, 2003.
The principal terms of the employment agreement include: annual salary of
$400,000; a car allowance not to exceed $1,500 per month; provision of certain
medical and other employee benefits; prohibition against competing with Mace
during employment and for a three-month period following a termination of
employment; and a $2.5 million payment in the event that Mr. Paolino's
employment is terminated for certain reasons set forth in the employment
agreement. The termination payment is not due in the event of termination due to
death or disability or certain prohibited conduct, as more fully set forth in
the employment agreement. The termination payment is due if Mr. Paolino is
terminated for unsatisfactory job performance. The employment agreement also
entitles Mr. Paolino to a $2.5 million change-of-control bonus.
Other Executive Employment Agreements
The primary terms of the employment agreements for Robert M. Kramer, Gregory M.
Krzemien, and Ronald R. Pirollo expired on March 26, 2003. Messrs. Kramer and
Krzemien are working on a month-to-month, at-will basis. Mr. Pirollo or the
Company may terminate Mr. Pirollo's employment at any time. Under the prior
employment agreements, Mace granted to each of these executive officers options
to purchase shares of Mace common stock at $5.375 per share that vest over a
period of four years. The table below discloses the current salary and initial
option grants for these executive officers.
Name Office Annual Salary Option Grant
Robert M. Kramer Chief Operating Officer, Executive $156,250 100,000
Vice President, General Counsel,
and Secretary
Gregory M. Krzemien Chief Financial Officer $135,500 62,500
and Treasurer
Ronald R. Pirollo Chief Accounting Officer $119,500 25,000
and Corporate Controller
The information in the sections entitled "Compensation Committee Interlocks and
Insider Participation" "Board Compensation Committee Report on Executive
Compensation," and "Performance Graph" in the Proxy Statement to be filed by us
with the United States Securities and Exchange Commission no later than 120 days
after the close of our fiscal year ended December 31, 2003 (the "Proxy
Statement") is incorporated herein by reference.
36
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Beneficial Ownership
The following beneficial ownership table sets forth information as of January
31, 2004, regarding beneficial ownership of shares of Mace common stock by the
following persons:
-- each person who is known to Mace to own beneficially more than 5% of the
outstanding shares of Mace common stock, based upon Mace's records or the
records of the Securities and Exchange Commission;
-- each director of Mace;
-- each Named Executive Officer; and
-- all directors and executive officers of Mace as a group.
Unless otherwise indicated, to Mace's knowledge, all persons listed on the
beneficial ownership table below have sole voting and investment power with
respect to their shares of Mace common stock. Shares of Mace common stock
subject to options or warrants exercisable within 60 days of January 31, 2004,
are deemed outstanding for the purpose of computing the percentage ownership of
the person holding such options or warrants, but are not deemed outstanding for
computing the percentage ownership of any other person.
Name and Address of Amount and Nature of Percentage of
Beneficial Owner Beneficial Ownership Common Stock Owned (1)
------------------------------------------------------------------------------
Louis D. Paolino, Jr.
1000 Crawford Place, Suite 400
Mt. Laurel, NJ 08054 2,812,474 (2) 21.3%
Excel Legacy Holdings, Inc.
16955 Via Del Campo
San Diego, CA 92127 1,906,250 (3) 15.3
Mark S. Alsentzer 552,500 (4) 4.4
Matthew J. Paolino 269,354 (5) 2.2
Robert M. Kramer 387,324 (6) 3.0
Gregory M. Krzemien 262,750 (7) 2.1
Ronald R. Pirollo 108,334 (8) *
Constantine N. Papadakis, Ph.D. 47,500 (9) *
All current directors and
executive officers as a group (7
persons) 4,440,236 (10) 31.7
* Less than 1% of the outstanding shares of Mace common stock.
(1) Percentage calculation is based on 12,451,771 shares outstanding on January
31, 2004.
(2) Includes (i) warrants to acquire 568,182 shares, and (ii) options to
purchase 163,334 shares.
(3) Includes (i) 1,750,000 shares and (ii) warrants to purchase 31,250 shares,
all held by Millennia Car Wash LLC, a limited liability company wholly
owned by Excel Legacy Holdings, Inc.
(4) Includes (i) warrants to purchase 25,000 shares and (ii) options to
purchase 27,500 shares.
(5) Includes options to purchase 67,500 shares.
(6) Includes (i) warrants to acquire 37,500 shares and (ii) options to purchase
280,000 shares.
(7) Includes options to purchase 237,500 shares.
(8) Includes options to purchase 103,334 shares.
(9) Represents options to purchase 47,500 shares.
(10) See Notes 2, 4, 5, 6, 7, 8, and 9 above.
37
Equity Compensation Plan Information
See the information contained under the heading "Equity Compensation Plan
Information" within Item 11 of this Form 10-K regarding shares authorized for
issuance under equity compensation plans approved by stockholders and not
approved by stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective August 1, 2000, Mace entered into a five-year lease with Bluepointe,
Inc., a corporation controlled by Louis D. Paolino, Jr., Mace's Chairman, Chief
Executive Officer and President, for Mace's executive offices in Mt. Laurel, New
Jersey. The lease terms were subject to a survey of local real estate market
pricing and approval by the Company's Audit Committee and provide for an initial
monthly rental payment of $15,962, which increases by 5% per year in the third
through fifth years of the lease. Mace believes that the terms of this lease
(based on an annual rate of $19.00 per square foot ) are competitive when
compared to similar facilities in the Mt. Laurel, New Jersey area. Mace has also
entered into a three-year furniture lease/purchase agreement with Bluepointe,
Inc., dated January 1, 2001, which provided for an initial payment of $20,000
and monthly rental payments thereafter of $4,513, for the use of the furnishings
in Mace's executive offices. The rental rates were based upon a third-party
valuation of the furnishings. The furniture lease has expired and Mace has
purchased the furniture.
The Company purchased charter airline services from Air Eastern, Inc., and LP
Learjets, LLC, charter airline companies owned by Louis D. Paolino, Jr., the
Company's Chairman, Chief Executive Officer and President. The Company incurred
approximately $5,000 in 2003 and $29,000 in 2002 for such services. On November
6, 2001, the Audit Committee approved an arrangement subject to quarterly review
under which the Company prepays LP Learjets, LLC $5,109 per month for the right
to use a Learjet 31A for 100 hours per year. Additionally, when the Learjet 31A
is used, the Company pays to third parties unaffiliated with Louis D. Paolino,
Jr., the direct costs of the Learjet's per-hour use, which include fuel, pilot
fees, engine insurance and landing fees. As of July 2002, the Company is no
longer prepaying LP Learjets, LLC for the future right to use the Learjet 31A.
In February 2000, the Company entered into a Management Agreement with Mark
Sport, a Vermont corporation controlled by Jon E. Goodrich, a director of the
Company through December, 2003. The Management Agreement entitled Mark Sport to
operate the Company's Security Products Segment and receive all profits or
losses for a seven-month term beginning January 1, 2000 in exchange for certain
payments to the Company. The Management Agreement was extended several times
through amendments. A February 21, 2002 amendment extended the term of the
Management Agreement through April 30, 2002, and reconciled the amount owed by
Mark Sport to the Company under the Management Agreement from February 2000
through December 31, 2001. Mark Sport and the Company agreed in the amendment
that Mark Sport, as of December 31, 2001, owed the Company $127,000, resulting
in a resolution of certain disputes and a reduction of the amounts owed by Mark
Sport of approximately $92,000. The Management Agreement expired on April 30,
2002 and was further amended on July 22, 2002 to reconcile the amount owed by
Mark Sport to Mace under the Management Agreement for the period January 1, 2002
through April 30, 2002. Mark Sport and Mace agreed in their final amendment that
Mark Sport owed the Company $100,000 for this period, resulting in a resolution
of certain disputes and a reduction of the amounts recorded by the Company as
owed by Mark Sport of approximately $39,000. At December 31, 2003, Mark Sport
owed the Company $127,000.
The Company's Consumer Products Division leases manufacturing and office space
under a five-year lease with Vermont Mill, Inc. ("Vermont Mill"), which provides
for monthly lease payments of $9,167 through November 2004. The Company has
exercised an option to continue the lease through November 2009. The rent will
increase by a CPI factor in November 2004. Vermont Mill is controlled by Jon E.
Goodrich, a director of the Company through December 2003. The Company believes
that the lease rate is lower than lease rates charged for similar properties in
the Bennington, Vermont area. On July 22, 2002, the lease was amended to provide
Mace the option and right to cancel the lease with proper notice and a payment
equal to six months of the then current rent for the leased space occupied by
Mace. On March 1, 2004, Vermont Mill agreed to pay the $127,000 that Mark Sport
owes the Company by giving the Company a monthly rent reduction of $1,762. The
rent credit commences in July 2004 and continues for 72 months.
38
Vermont Mill borrowed a total of $228,671 from the Company through December 31,
2001. On February 22, 2002, Vermont Mill executed a three year promissory note
with monthly installments of $7,061 including interest at a rate of 7%. The
Company's Lease Agreement with Vermont Mill provides for a right of offset of
lease payments against this promissory note in the event monthly payments are
not made by Vermont Mill. At December 31, 2003, the balance owed on this
promissory note was $102,000.
From January 1, 2003 through December 31, 2003, the Company's Electronic
Surveillance Products Division sold approximately $51,000 of electronic security
equipment to DSS, Inc. and approximately $22,000 to Security Systems and
Installations, Inc. Louis Paolino, III, the son of the Company's CEO, Louis D.
Paolino, Jr., is a one-third owner of DSS, Inc. and a fifty percent owner of
Security Systems and Installations, Inc. The pricing extended to DSS, Inc. and
Security Systems and Installations, Inc. is no more favorable than the pricing
given to third party customers who purchase in similar volume. Additionally,
DSS, Inc. was hired by the Company to install security cameras in several of the
Company's car washes at an installation fee of $6,800. At December 31, 2003,
DSS, Inc. and Security Systems and Installations, Inc. owed the Company
approximately $37,000 and $20,000, respectively.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees. The Company was billed $115,103 through March 5, 2004, by Grant
Thornton LLP for the audit of Mace's annual financial statements for the fiscal
year ended December 31, 2003, and for the review of the financial statements
included in Mace's Quarterly Reports on Forms 10-Q filed during 2003. The
company estimates approximately $25,000 of fees remain unbilled related to the
2003 audit as of March 5, 2004. The Company was billed $98,819 by Grant Thorton
LLP for audit of Mace's annual financial statements for the fiscal year ended
December 31, 2002, and for the review of the financial statements included in
Mace's Quarterly Reports on Forms 10-Q filed during 2002.
Tax Services. The Company was billed $20,260 and $11,290 for tax compliance
services rendered by Grant Thornton LLP during 2003 and 2002, repectively.
All Other Fees. Mace was billed $17,983 for non-audit services, principally SEC
compliance services, rendered by Grant Thornton LLP during 2002.
Other Matters. The Audit Committee of the Board of Directors has considered
whether the provision of financial information systems design and implementation
services and other non-audit services is compatible with maintaining the
independence of Mace's independent auditors, Grant Thornton LLP. The Audit
Committee pre-approves all auditing services and permitted non-audit services
(including the fees and terms thereof) to be performed for the Company by its
independent auditor, subject to the de minimus exceptions for non-audit services
described in Section 10A (i) (1) (B) of the Exchange Act which are approved by
the Committee prior to the completion of the audit. The Audit Committee may form
and delegate authority to subcommittees consisting of one or more members when
appropriate, including the authority to grant pre-approvals of audit and
permitted non-audit services, provided that decisions of such subcommittee to
grant pre-approvals shall be presented to the full Audit Committee at its next
scheduled meeting.
39
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) Consolidated Financial Statements:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets as of December 31, 2003 and 2002
Consolidated Statements of Operations for the years ended December 31,
2003, 2002 and 2001
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the years ended December 31,
2003, 2002 and 2001
Notes to Consolidated Financial Statements
(a) (2) The requirements of Schedule II have been included in the Notes to
Consolidated Financial Statements. All other schedules for which
provision is made in the applicable accounting regulations of the
United States Securities and Exchange Commission ("the Commision")
are not required under the related instructions or are inapplicable,
and therefore, have been omitted.
(a) (3) Exhibits:
The following Exhibits are filed as part of this report (exhibits
marked with an asterisk have been previously filed with the Commission
and are incorporated herein by this reference):
(a) Exhibits:
*3.3 Amended and Restated Bylaws of Mace Security International, Inc.
(Exhibit 3.3 to the Company's Report on Form 10-KSB for the year
ended December 31, 1999 (the "1999 Form 10-KSB"))
*3.4 Amended and Restated Certificate of Incorporation of Mace
Security International, Inc. (Exhibit 3.4 to the 1999 Form
10-KSB)
*3.5 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of Mace Security International, Inc.
*3.6 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of Mace Security International, Inc.
*10.3 1993 Non-Qualified Stock Option Plan (1)
*10.22 Trademarks(1)
*10.28 Warrants in connection with the acquisition of the assets of the
KinderGard Corporation(2)
*10.71 Employment Contract between Mace Security International, Inc. and
Robert M. Kramer dated March 26, 1999 (3)
*10.72 Employment Contract between Mace Security International, Inc. and
Gregory M. Krzemien dated March 26, 1999 (3)
*10.73 Amendment No. 1 to Merger Agreement between Louis D. Paolino, Red
Mountain Holding, Ltd. and Mace Security International, Inc.
dated April 13, 1999
*10.74 Amendment No. 1 to Stock purchase Agreement, between Louis
Paolino, Jr. and Mace Security International, Inc. dated April
13, 1999
*10.98 Mace Security International, Inc. 1999 Stock Option Plan
(3).(Exhibit 10.98 to the June 30, 1999 Form 10-QSB dated August
13, 1999)
*10.123 Loan Agreement and Promissory Note dated February 17, 2000,
between the Company, its subsidiary Mace Car Wash - Arizona, Inc.
and Bank One, Texas, NA. (Exhibit 10.123 to the December 31, 1999
Form 10-KSB dated March 29, 2000)
*10.124 Business Loan Agreement dated January 31, 2000, between the
Company, its subsidiary - Colonial Full Service Car Wash, Inc.,
and Bank One, Texas, N.A.; Promissory Note dated February 2, 2000
between the same parties as above in the amount of $400,000
(pursuant to instruction 2 to Item 601 of Regulation S-B, two
additional Promissory Notes, which are substantially identical in
all material respects except as to the amount of the Promissory
Notes) are not being filed in the amount of: $19,643.97 and
$6,482; and a Modification Agreement dated as of January 31, 2000
between the same parties as above in the amount of $110,801.55
(pursuant to instruction 2 to Item 601 of Regulation S-B,
Modification Agreements, which are substantially identical in all
material respects except to the amount of the Modification
Agreement) are not being filed in the amounts of: $39,617.29,
$1,947,884.87, $853,745.73, and $1,696,103.31.(Exhibit 10.124 to
the December 31, 1999 Form 10-KSB dated March 29, 2000)
40
*10.128 Form of Equity Purchase Agreement to be issued by Mace to Fusion
Capital (included as Exhibit A to Master Facility Agreement in
Exhibit 10.1 of S-3). (Exhibit 4.1 to the Company's Current Form
on S-3 dated April 11, 2000).
*10.129 Master Facility Agreement, dated as of April 5, 2000, between
Mace and Fusion Capital (Exhibit 10.1 to the Company's Current
Form on S-3 dated April 11, 2000).
*10.130 Loan Agreement and Promissory Note dated November 28, 2000,
between the Company, its subsidiary Eager Beaver Car Wash, Inc.
and Bank One, Texas, N.A. in the amount of $6,754,400. (Exhibit
10.130 to the December 31, 2000 Form 10-KSB dated March 20, 2001)
*10.131 Lease Agreement dated August 1, 2000 among Mace Security
International, Inc. and Bluepointe, Inc. (Exhibit 10.131 to the
December 31, 2000 Form 10-KSB dated March 20, 2001)
*10.132 Amendment dated March 13, 2001, to Business Loan Agreement
between the Company, its subsidiary Colonial Full Service Car
Wash, Inc., and Bank One, Texas, N.A. (pursuant to instruction 2
to Item 601 of Regulation S-B, two additional amendments which
are substantially identical in all material respects, except as
to the borrower being Eager Beaver Car Wash, Inc. and Mace Car
Wash - Arizona, Inc., are not being filed).(Exhibit 10.132 to the
December 31, 2000 Form 10-KSB dated March 20, 2001)
*10.133 Modification Agreement between the Company, its subsidiary -
Colonial Full Service Car Wash, Inc., and Bank One, Texas, N.A.
in the amount of $2,216,000 (pursuant to Instruction 2 to Item
601 of Regulation S-K, Modification Agreements, which are
substantially identical in all material respects except to amount
and extension date of the Modification Agreement are not being
filed in the original amounts of $984,000 (extended to August 20,
2004) and $1,970,000 (extended to June 21, 2004).(Exhibit 10.133
to the June 30, 2001 Form 10-Q dated August 9, 2001)
*10.134 Term Note dated November 6, 2001, between the Company, its
subsidiary, Colonial Full Service Car Wash, Inc., and Bank One,
Texas, N.A. in the amount of $380,000.(Exhibit 10.134 to the
September 30, 2001 Form 10-Q dated November 9, 2001)
*10.135 Amendment dated February 21, 2002 to Management Agreement between
the Company and Mark Sport, Inc. and original Management
Agreement dated February 1, 2000 to which the amendment
relates.(Exhibit 10.135 to the December 31, 2001 Form 10-K dated
March 11, 2002)
*10.136 Amendment dated February 25, 2002 to Lease Agreement between the
Company and Vermont Mill Properties, Inc. and original Lease
Agreement dated November 15, 1999 to which the amendment
relates.(Exhibit 10.136 to the December 31, 2001 Form 10-K dated
March 11, 2002)
*10.137 Promissory Note between the Company and Vermont Mill Properties,
Inc. dated February 22, 2002 in the amount of $228,671. (Exhibit
10.137 to the December 31, 2001 Form 10-K dated March 11, 2002)
*10.138 Extension dated February 6, 2002 of Equity Purchase Agreement
between the Company and Fusion Capital Fund II, LLC. (Exhibit
10.138 to the December 31, 2001 Form 10-K dated March 11, 2002)
*10.139 Term note dated April 30, 2002, between the Company, its
subsidiary, Mace Truck Wash, Inc., and Bank One, Texas, N.A. in
the amount of $342,000.(Exhibit 10.139 to the June 30, 2002 Form
10-Q dated August 14, 2002)
*10.140 Master Lease Agreement dated June 10, 2002, between the Company,
its subsidiary, Colonial Full Service Car Wash, Inc., and Banc
One Leasing Corporation in the amount of $193,055. (Exhibit
10.140 to the June 30, 2002 Form 10-Q dated August 14, 2002)
*10.141 Amendment dated July 22, 2002 to Management Agreement between the
Company and Mark Sport, Inc.(Exhibit 10.141 to the June 30, 2002
Form 10-Q dated August 14, 2002)
*10.142 Amendment dated July 22, 2002 to Lease Agreement between the
Company and Vermont Mill Properties, Inc. (Exhibit 10.142 to the
June 30, 2002 Form 10-Q dated August 14, 2002)
*10.143 Asset Purchase Agreement dated as of August 12, 2002, by and
among Micro-Tech Manufacturing, Inc. and Moshe Luski on the one
hand, and Mace Security Products, Inc., a wholly owned subsidiary
of Mace Security International, Inc. (Exhibit 10.143 to September
30, 2002 Form 10-Q dated November 12, 2002)
*10.144 Lease Schedule and Addendum dated August 28, 2002 in the amount
of $39,434 to Master Lease Agreement dated June 10, 2002, between
the Company, its subsidiary, Colonial Full Service Car Wash,
Inc., and Banc One Leasing Corporation. (Exhibit 10.144 to the
September 30, 2002 Form 10-Q dated November 12, 2002)
*10.145 Promissory Note and Loan Agreement dated October 31, 2002 between
the Company, its subsidiary, Mace Security Products, Inc. and
Wachovia Bank, N.A. in the amount of $480,000.(Exhibit 10.145 to
the December 31, 2002 Form 10-K dated March 19, 2003)
*10.146 Line of Credit Note and Credit Agreement dated December 15, 2002
between the Company, its subsidiary, Mace Security Products, Inc.
and Bank One Texas, N.A. in the amount of $500,000. (Exhibit
10.146 to the December 31, 2002 Form 10-K dated March 19, 2003)
*10.147 Amendment dated February 21, 2003 to Business Loan Agreement
between the Company, its subsidiary, Eager Beaver Car Wash, Inc.,
and Bank One, Texas, N.A. (pursuant to instruction 2 to Item 601
of Regulation S-K, two additional amendments which are
substantially identical in all material respects, except as to
the borrower being Mace Truck Wash, Inc. and Mace Security
Products, Inc., are not being filed). (Exhibit 10.147 to the
December 31, 2002 Form 10-K dated March 19, 2003)
41
*10.148 Note Modification Agreement dated February 21, 2003, between the
Company, its subsidiary, Colonial Full Service Car Wash, Inc. and
Bank One, Texas, N.A. in the amount of $348,100. (Exhibit 10.148
to the December 31, 2002 Form 10-K dated March 19, 2003)
*10.149 Note Modification Agreement dated February 21, 2003, between the
Company, its subsidiary, Mace Car Wash - Arizona, Inc. and Bank
One, Texas, N.A. in the amount of $4,281,578.(Exhibit 10.149 to
the December 31, 2002 Form 10-K dated March 19, 2003)
*10.150 Modification Agreement dated March 14, 2003, between the Company,
its subsidiary, Mace Security Products, Inc. and Wachovia Bank,
N.A. (Exhibit 10.150 to the December 31, 2002 Form 10-K dated
March 19, 2003)
*10.151 Note Modification Agreement dated August 5, 2003, effective July
10, 2003, between the Company, its subsidiary, Mace Car Wash -
Arizona, Inc. and Bank One, Texas, N.A. in the amount of
$731,455. (Exhibit 10.151 to the June 30, 2003 Form 10-Q dated
August 12, 2003)
*10.152 Employment Contract dated August 12, 2003, between Mace Security
International, Inc. and Louis D. Paolino, Jr. (Exhibit 10.152 to
the June 30, 2003 Form 10-Q dated August 12, 2003)
*10.153 Consolidated Promissory Note and Amended and Restated Loan
Agreement dated October 20, 2003 between the Company, its wholly
owned subsidiary, Mace Security Products, Inc. and Wachovia Bank,
N.A. in the amount of $728,800. (Exhibit 10.153 to the September
30, 2003 Form 10-Q dated November 12, 2003)
*10.154 Amendment dated October 25, 2003 to Employment Contract dated
August 12, 2003 by and between Mace Security International, Inc.
and Louis D. Paolino, Jr. (Exhibit 10.154 to the September 30,
2003 Form 10-Q dated November 12, 2003)
10.155 Modification and Extension of Note and Ratification of Mortgage
Liens dated November 28, 2003, between the Company, its
subsidiary, Eager Beaver Car Wash, Inc. and Bank One, Texas, N.A.
in the amount of $5,723,079.
10.156 Note Modification Agreement and Amendment to Credit Agreement
dated December 15, 2003, between the Company, its subsidiary,
Mace Security Products, Inc. and Bank One, Texas, N.A. in the
amount of $500,000.
10.157 Note Modification Agreement and Amendment to Credit Agreement
dated January 21, 2004, between the Company, its subsidiary,
Colonial Full Service Car Wash, Inc. and Bank One, Texas, N.A. in
the amount of $48,725.50.
10.158 Credit Agreement dated as of December 31, 2003 between the
Company, its subsidiary, Eager Beaver Car Wash, Inc., and Bank
One Texas, N.A. (pursuant to instruction 2 to Item 601of
Regulation S-K, four additional credit agreements which are
substantially identical in all material respects, except as to
the borrower being Mace Car Wash - Arizona, Inc., Colonial Full
Service Car Wash, Inc., Mace Security Products, Inc. and Mace
Security International, Inc., are not being filed.)
11 Statement Re: Computation of Per Share Earnings
14 Code of Ethics and Business Conduct
21 Subsidiaries of the Company
23.1 Consent of Grant Thornton LLP
24 Power of Attorney (included on signature page)
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
* Incorporated by reference
+ Schedules and other attachments to the indicated exhibit have been
omitted. The Company agrees to furnish supplementally to the
Commission upon request a copy of any omitted schedules or
attachments.
42
(1) Incorporated by reference to the exhibit of the same number filed with
the Company's registration statement on Form SB-2 (33-69270) that was
declared effective on November 12, 1993.
(2) Incorporated by reference to the Company's Form 10-QSB report for the
quarter ended 9/30/94 filed on November 14, 1994. It should be noted
that Exhibits 10.25 through 10.34 were previously numbered 10.1
through 10.10 in that report.
(3) Indicates a management contract or compensation plan or arrangement.
(b) Current Reports on Form 8-K or 8-K/A:
On October 29, 2003, the Company filed a report on Form 8-K dated October
29, 2003, under Item 5 and Item 12, to report the resignation of Richard
B. Muir from the Company's Board of Directors due to other business
commitments, and the election of Burton Segal to fill the vacancy.
On November 12, 2003, the Company filed a report on Form 8-K dated
November 12, 2003, under Item 7 and Item 12, to report the issuance of a
press release announcing the Company's financial results for the fiscal
quarter and nine month period ended September 30, 2003.
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
MACE SECURITY INTERNATIONAL, INC.
By: /s/ Louis D. Paolino, Jr.
------------------------
Louis D. Paolino, Jr.
Chairman of the Board,
Chief Executive Officer,
and President
DATED the 12th day of March, 2004.
KNOW ALL MEN BY THESE PRESENTS that the undersigned does hereby constitute
and appoint Louis D. Paolino, Jr. and Gregory M. Krzemien, or either of them
acting alone, his true and lawful attorney-in-fact and agent, with full power of
substitution and revocation for him and in his name, place and stead, in any and
all capacities, to sign this Report on Form 10-K of Mace Security International,
Inc. and any and all amendments to the Report and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or his or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated:
Name Title Date
/s/ Louis D. Paolino, Jr. Chairman of the Board, 3/12/04
------------------------- Chief Executive Officer,
Louis D. Paolino, Jr. President and Director
(Principal Executive Officer)
/s/ Gregory M. Krzemien Chief Financial Officer 3/12/04
----------------------- and Treasurer (Principal
Gregory M. Krzemien Financial Officer)
/s/ Ronald R. Pirollo Chief Accounting Officer and 3/12/04
--------------------- Corporate Controller (Principal
Ronald R. Pirollo Accounting Officer)
/s/ Matthew J. Paolino Director, Vice President 3/12/04
----------------------
Matthew J. Paolino
/s/ Constantine N. Papadakis, Ph.D. Director 3/12/04
-----------------------------------
Constantine N. Papadakis, Ph.D.
/s/ Mark S. Alsentzer Director 3/12/04
---------------------
Mark S. Alsentzer
/s/ Burton Segal Director 3/12/04
----------------
Burton Segal
44